At this point in time, the thesis on Apple (NASDAQ:AAPL) is pretty clear. Apple stock is a long term winning investment with tons of upside in a multi-year window due to stability in the legacy iPhone, iPad, and Mac businesses, growth in new hardware businesses like Watch and TV, and growth in the new high-margin software business.
But, due to questions regarding global economic expansion, global smartphone market saturation, and persistent trade war uncertainty, the long-term growth drivers currently are being clouded by near-term noise. This near term noise has manifested itself into a 20%-plus sell-off in Apple.
Long term, recent weakness in AAPL is nothing more than a healthy reset after a multi-year bull run. Much like other sell-offs during the past decade, this one will ultimately prove to be a buying opportunity.
But, history also says that a bottom may not be in just yet. Instead, this sell-off in Apple may last for a few more months, and could drag the stock another 10% lower.
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. Buying the dip here might be something that requires a good deal of patience.
History Says Bottom Isn’t Here Yet
As I’ve pointed out before, Apple stock has undergone two large corrections over the past decade that bear strong similarities to this current correction. If history repeats itself, then AAPL is positioned to remain weaker for longer, but ultimately will bounce back.
The first major sell-off was in 2012-13. 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. From a valuation perspective, the trailing P/E multiple fell roughly 38% from 16 to 10.
The second major sell-off was in 2015-16. Back then, everyone was worried about slowing iPhone demand, too. During that sell-off, AAPL dropped 30% off recent highs, and didn’t bottom until twelve-plus months after it peaked. The trailing P/E multiple fell over 40% from 17.5 to 10.
This major sell-off in 2018 bears strong similarities to those sell-offs, with everyone being worried about slowing iPhone demand again and the valuation reaching highs not seen since prior peaks.
If history repeats itself, AAPL still has more to fall before bottoming out. The current sell-off in Apple stock measures a 23% drop from recent highs. That is smaller than the drop in each of the prior two corrections. This sell-off has also only lasted two months, versus seven to twelve months during prior corrections.
Assuming this sell-off follows the historical precedent, then we are talking about a ~30% drop from highs that ends early next year, or a ~$165 bottom in early 2019.
Assuming fiscal 2019 earnings come in at the consensus mark of $13.50, that would equate to a trailing earnings multiple of 12, a 40% drop off recent valuation highs and consistent with prior sell-offs.
Thus, history says Apple stock will remain weaker for longer.
Long Term Fundamentals Remain Strong
Long term investors would be wise not to pay too much attention to this near term noise. This noise isn’t a reason to give up on the stock. Instead, it’s simply rationale for acting cautiously about buying the dip.
The fundamentals here remain very good. iPhone revenue growth is slowing, yes, and unit growth is null. But average-selling-price growth is robust due to increasing consumer dependence on smartphones, and this remains a solid growth business in the long run through a stabilized unit base and higher ASPs.
Meanwhile, the iPad and Mac businesses are also largely stable for similar reasons. The Other Products business is ramping up growth, led by big gains in Apple Watch. And, most important, 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 as markets get choppier.
Overall, the outlook on AAPL stock all depends on your horizon. The short term outlook on Apple isn’t great. But, the long term outlook is quite promising.
Bottom Line on Apple Stock
History says the recent sell-off in Apple stock isn’t over just yet. But, that doesn’t mean it is time to give up on the stock. Instead, that simply means that this is a time to exercise caution about buying the dip.
As of this writing, Luke Lango was long AAPL.