In early November, consumer electronics giant Apple (NASDAQ:AAPL) reported fourth-quarter numbers that, while good, were overshadowed by a weak holiday quarter guide which implied soft demand for the company’s core iPhones. Ever since, Apple stock has been struggling. AAPL is down 13% in November alone, and is 17% off recent highs.
With the broader stock market in turmoil, investors are naturally asking: when will Apple stock bottom?
We’ve seen this rodeo before. Believe it or not, the world’s biggest and strongest company has had down-drafts before. Notably, Apple stock has had two periods of prolonged and material weakness over the past decade. Both times, much like this time, the sell-off was sparked by concerns over waning iPhone demand. Both times, those concerns were overstated in the big picture, and AAPL stock ultimately rebounded.
Thus, history says this isn’t the end of Apple stock. Rather, it is just a correction in an otherwise secular growth stock.
But, history also says that a bottom may not be in just yet. I’m bullish on AAPL at current levels given strong go-forward growth fundamentals, a favorable valuation, and the company’s high-quality financial attributes which should be given more merit amid stock market volatility. Nonetheless, prior downdrafts in Apple stock have been much more severe under similar conditions.
Thus, while I’m bullish in the long term, I also fear there may be more near term downside ahead. Long term investors shouldn’t be too concerned about this. But, they should be aware of it, because “buying the dip” might be something that requires a good deal of patience.
History Says An AAPL Rebound Is Coming, But Maybe Not Yet
Apple stock currently sits about 17% off recent highs. That may seem like a big plunge for a formerly trillion dollar company. It is. But, AAPL stock also isn’t foreign to such big drops.
Notably, AAPL has had two big periods of prolonged and material weakness over the past decade. Both sell-offs ended with big rebounds, and Apple stock subsequently tracking to new highs. But, both sell-offs were also much bigger and lasted much longer than the current sell-off.
The first was in 2012-13, when everyone was worried about slowing iPhone 5 demand. During that selloff, Apple stock dropped 40% off recent highs, and didn’t really bottom until seven months after it peaked.
The second major sell-off was in 2015-16. Back then, everyone was worried about slowing iPhone demand, too. During that selloff, Apple stock dropped 30% off recent highs, and didn’t bottom until twelve-plus months after it peaked.
We have the same problems today. Everyone is worried about slowing iPhone demand. Apple’s holiday quarter guide was weak. iPhone suppliers have also delivered weak guides. Analyst channel checks have been largely bearish. Estimates are coming down.
Thus, we have a similar set-up here as we had in the prior two sell-offs. But, relative to those sell-offs, this one is the junior version. AAPL stock is just 17% off recent highs, and the selloff has lasted just over a month. Moreover, during the 2012-13 and 2015-16 selloffs, Apple stock bottomed at a trailing earnings multiple below 10. Today, AAPL still trades at 16x forward earnings.
In other words, while history says that Apple stock will eventually rebound, it also says that this rebound won’t happen just yet.
Long Term Fundamentals and Valuation Are Favorable
The long-term fundamentals supporting Apple stock are strong, so I don’t think long-term oriented investors should give up on the name. Instead, investors should just exercise caution and patience in buying the dip.
iPhone revenue growth is slowing, yes, and unit growth is null. But average-selling-price growth is robust, and this remains a solid growth business through a stabilized unit base and higher ASPs. Meanwhile, the iPad and Mac businesses are also largely stable. The “Other Products” business is ramping up growth, led by big gains in Apple Watch. And, most importantly, the high-margin Services business continues to grow at a ~30% rate.
In other words, the growth fundamentals of this business are still very good. Plus, the financial strengths of Apple (global reach, stable demand, healthy balance sheet, and relatively low multiple) will become more and more attractive to investors the choppier markets get.
Overall, Apple stock isn’t a sell here. The long-term fundamentals are simply too strong. Once near-term noise clears, this stock will have healthy runway to head higher.
Bottom Line on Apple Stock
Apple stock is a great long-term investment. Because of its strong long-term fundamentals, AAPL isn’t a sell here.
But, investors may want to exercise patience and caution in buying the dip. Prior sell-offs in Apple stock have been bigger and longer than the current one. If history repeats itself, there’s more pain ahead before the big rebound.
As of this writing, Luke Lango was long AAPL.
