Buy the Coming Correction in Apple Stock

Longer-term catalysts like 5G and wearables will overcome the coronavirus

Apple (NASDAQ:AAPL) has been in a clear uptrend in the last one year. During this period, Apple stock has surged by 90%. Even at a market capitalization of $1.4 trillion, I don’t believe that AAPL shares are in a bubble or overvalued. A price-earnings-ratio of 23.59 certainly does not suggest a bubble or overvaluation. However, a sharp uptrend is generally followed by some profit booking. I see that happening for this equity in the foreseeable future.

Buy the Coming Correction in Apple Stock
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In the next quarter or two, the coronavirus outbreak in China is likely to be the downside trigger. From a supply perspective, Ming-Chi Kuo, an analyst with TF International Securities, expects iPhone shipments to decline by 10% in the first quarter of 2020. Market research firm Canalys has a more bearish forecast and expects smartphone shipments in China to drop by 40% to 50% between fourth-quarter 2019 and Q1 2020.

From a sales perspective, analysts at Wedbush believe that the coronavirus outbreak could delay sales of one million iPhones. It is worth noting that for Q2 2020, Apple has provided a “wider than usual” revenue guidance to account for the virus’ impact.

However, the global outbreak is likely to dampen consumer sentiment and it’s likely that Apple will have a difficult quarter. A 5% to 10% correction in Apple stock cannot be ruled out, presenting a viable accumulation opportunity.

Big Opportunities Ahead

Be it the benefit from 5G, growth in wearables or upside from services revenue, Apple has big opportunities ahead.

Dr. Tenpao Lee, professor of economics at Niagara University, elaborated on the outlook in an email to InvestorPlace. According to Dr. Lee:

We are in the beginning of the second super cycle of the information technology revolution, i.e. 5G. Many new applications will be developed comparable to the smart phone of 2000. As Apple is the leading company of 5G applications, Apple’s stock price should continue its upward trend in the future.

Talking about innovation and the coronavirus impact, Dr. Lee opines:

Apple has been very good in developing new innovative products, such as the i-pad, i-phone, i-watch, etc. The ability to develop new innovative products is the key to being successful in the new era of 5G and Apple has the unique competitive edge to take its company culture of innovation. However, in the short term, Apple’s supply chain is very likely to be interrupted by the coronavirus in China. We don’t know how bad the situation is and could be very bad beyond imagination. It may take half a year to rebuild its global supply chain and the new supply chain will be different from the current one. Some new Apple suppliers will be developed. So, Apple’s stock price may take a dip in the next three to six months and then resume its upward movement.

It is worth noting that for Q1 2020, Apple reported revenue of $10 billion from the Wearables, Home and Accessories segment. With an annualized revenue potential of $40 billion, the segment is already making an impact. Even in the services segment, the annualized revenue potential is $50.8 billion. In the coming years, these segments will impact valuations and stock upside potential.

Acquisition Driven Growth

As of Q1 2020, Apple reported cash and equivalents of $207 billion. The company has robust financial muscles to pursue inorganic growth.

In May 2019, Tim Cook was quoted saying that “Apple buys a company every few weeks.” The company’s focus is on acquiring talent and intellectual property.

The key point is that Apple is likely to remain high on innovation, be it through the organic or inorganic route. This will help the company make inroads into early growth opportunities.

With the cash buffer, the opportunities are limitless. As an example, there are rumors that Apple is still working on its electric car project. While these are speculations, it’s not unlikely given the opportunities in the electric vehicle market. Similarly, smart glasses are also in the pipeline.

My Final Thoughts on Apple Stock

For Q1 2020, Apple reported operating cash flow of $30.5 billion and free cash flow of $27.4 billion. This implies an annualized free cash flow of $110 billion. Clearly, Apple’s core business is a cash generating machine and the company has been making progress in terms of a more diversified product offering. With the launch of 5G, the company has additional growth triggers in the coming decade.

It is not surprising that Apple stock has been trending higher. However, I do believe that some correction is likely due to the coronavirus outbreak and its impact on the global economy. Any correction would be an opportunity to accumulate Apple stock.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/correction-opportunity-for-apple-stock/.

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