Like most other stocks, Apple (NASDAQ:AAPL) has taken a hit from the novel coronavirus pandemic. However, for long-term Apple stock investors, the outbreak may have been a godsend.
There is no question Apple’s financials will take a hit in the near term due to the Covid-19 disruptions. However, Apple is arguably the most financially strong stock in the world. Nothing about its long-term outlook has changed at all.
Analysts and investors bullish on Apple stock in December are still bullish today for all the same reasons. The biggest difference today is that the stock is cheaper thanks to Covid-19.
The Near-term Picture
Even the most bullish Apple stock investor likely won’t argue that the next several quarters will be rough.
Argus analyst Jim Kelleher recently updated his 2020 outlook for Apple. Kelleher cut his fiscal 2020 and 2021 earnings-per-share estimates from $13.47 and $14.86 to $12.87 and $14.55, respectively. However, Kelleher says if any company can navigate this difficult period, it’s Apple.
“Apple possesses multiple strengths to help carry it through this difficult period, including wearables (Air Pods), services (Apple Play), and a strong online business,” he says.
Argus has a “buy” rating and $350 price target for Apple stock.
As of the end of 2019, Apple had $205 billion in gross cash and $99 billion in net cash. That level of liquidity is unmatched in the market today.
Even in a worst-case scenario in which stay-at-home orders are extended and the damage to the economy is extreme, Apple has the cash to make it through the downturn. In fact, Apple is one of the few dividend-paying stocks that doesn’t have investors feeling a bit nervous at the moment.
Given its financial flexibility, Apple will certainly keep making its dividend payments. Kelleher says Apple may scale back its share buybacks. I doubt it. Apple doesn’t need $200 billion in cash. In fact, it has explicitly committed to reducing net cash to zero over time. Now is a great time to buy back stock at a discount, getting shareholders more bang for their buyback buck.
The Longer-term Outlook
Bank of America analyst Wamsi Mohan recently added Apple to the firm’s US1 List. The US1 List is a collection of the best long-term stocks to buy in the U.S. market. In a nutshell, Mohan says Covid-19 is temporary, and Apple has too many positive long-term trends to ignore.
“Apple continues to enjoy competitive advantage with its ecosystem, App Store, large/captive installed base and brand value,” Mohan says.
Bank of America cites third-party download data suggesting global App Store revenue was up about 18% in the first quarter of 2020 through mid-March. In addition, year-to-date in fiscal 2020, average selling price per download is up 6%. China app downloads in February were up 48%.
These are exactly the type of trends that Apple investors love to see. The more Apple transitions its business model from iPhone sales to recurring revenue, the more consistent its financials will be. Apple will have less pressure to rely on new iPhone designs and technology. A larger portion of its revenue will be high-margin Services revenue rather than lower-margin device sales.
Apple recently said it has 1.5 billion active devices worldwide. If it simply focuses on keeping those device users up to date with the latest technology and maximizing its revenue per user, Apple has a massive long-term opportunity ahead.
How to Play Apple Stock
In general, I agree with Kelleher’s recommendation of how investors should approach this downturn.
“In this turbulent environment, Argus is recommending that investors dollar-average into existing long-term positions in the highest-quality stocks,” Kelleher says.
Here are the simple steps investors need to be taking. If you don’t own Apple stock, start buying. If you do, buy some more. When the stock goes lower, buy some more. Repeat these steps as necessary.
As the global economy recovers, so will Apple’s sales numbers, and that will drive the share price higher. As the stock market recovers, Apple’s 15.9 forward earnings multiple will likely also expand, driving the share price higher. In the meantime, Apple will reward patient investors with a 1.2% dividend. It will also use its cash to buy back shares and boost EPS.
Apple may not be the most exciting stock in the market with the most near-term upside. But it may be the current generation of investors’ biggest blue-chip stock to buy at any opportunity.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
