Apple’s (NASDAQ:AAPL) huge winning streak may finally be coming to an end. AAPL stock has enjoyed an incredible run over the past 18 months. On a stock split-adjusted basis, Apple soared from $40 in January 2019 to as much as $138 last month. However, shares have headed sharply in reverse in September, falling to $110 now.
And the drop could have further to go. You see, despite the huge run in Apple’s stock price over the past 18 months, the actual operating business has hardly grown. When a stock runs up largely on momentum, that leaves it vulnerable to quick pullbacks when traders start to lean in the opposite direction. If Apple can’t find technical support right around where it is trading now, look for shares to continue down to the next support level around $95. Here’s why investors shouldn’t be too quick to buy at the current $110 level.
Tepid Growth
Over the past five years, Apple has only grown revenues 10% or so, as they’re up from $234 billion to $260 billion since 2015. The company has shown some operating scale, as it’s enjoyed a stronger 20% rise in net income. That figure is up from $53 billion to $64 billion annually over the same period. Neither of these resemble anything close to the sorts of numbers you’d expect from a stock that has tripled in the recent past, however.
You might point out that Apple can grow faster earnings than the above numbers thanks to the share buyback. And that’s true to a degree. But it’s much less so than in the past. For one thing, Apple had almost no debt previously. Now, it’s racked up nearly $100 billion in debt over the past five years. This is totally fine given Apple’s massive cash position and annual profits. However, Apple has spent much of its previous cash position on the share buyback already.
Thus, the amount of funds going into the share buyback may slow down as Apple stops wanting to add more debt to its pile. Meanwhile, the share buyback accomplishes less with the stock price so high. At a 20x P/E ratio, Apple got a 5% earnings yield when it repurchased it stock. Up here, however, the earnings yield is just 3%, meaning that Apple’s investments in its own stock — via the buyback — are much less beneficial. Put another way, even if Apple spent 100% of its annual profits on its buyback, it’d reduce the share count by just 3% per year. That is hardly enough to boost earnings dramatically.
Incremental Growth, But Nothing Transformative
The issue with the numbers above is that there’s no simple way to fix this. And arguably, it’s not even really a problem in one sense. Apple is the largest company in the world by market capitalization, and right near the top in terms of total revenues as well. Apple has already won the game. Its hardware rules consumer electronics, and its software ecosystem is a cash cow.
However, from this point, it’s extremely difficult to launch anything new that really matters. A $20/month subscription, for example, simply isn’t a big deal to Apple. Suppose Apple signs up 20 million people for something at that price. That’d be a huge win for nearly any other company. For Apple, though, that’s $5 billion a year in revenues, or merely 2% growth from the existing revenue base.
That’s why it’s so hard to get excited about new product lines such as the Airpods or the upcoming Apple Fitness offering. These can add a little bit at the margins, but at the core, the phone business is simply so big that nothing else matters much. And unless something radical happens, it’s hard to imagine Apple growing the phone business considerably either. They already have global reach and a lock on the high-end part of the smartphone market.
Again, there’s nothing wrong this. A mature company can do perfectly well riding its cash cows, paying fat dividends, and buying back loads of stock. Investors have made plenty of money with winners like this in the past. But when you pay more than 30x earnings for a company that is too big to grow, it greatly caps your upside.
AAPL Stock Verdict
From this price, AAPL stock is still quite expensive. Shares aren’t egregiously overpriced by any means, and certainly not compared to many of the more speculative software stocks. However, investors should come into Apple here with more modest expectations. Going forward, it’s as likely as not that AAPL stock will produce stock returns in line with the S&P 500 index as a whole, or slightly trailing the benchmark.
That’s not a terrible result by any means. Over time, the market tends to rise, and if the market goes up, there’s a good chance the largest company in the index will fare alright. However, the math here has totally changed since, say, 2016. Back then, Apple was still selling under a trillion dollar market cap and with a sub-18x P/E ratio. There were multiple ways to win, and potentially win big.
From the current $110 level, however, investors should plan for more modest outcomes. Apple is a safe blue chip, and in times like this, there’s a premium for that. Still, as some of the momentum money flows back out of Apple and other tech names, shares could trade significantly lower. If you’re patient, there’s a good chance you’ll see a better entry price for AAPL stock in coming months. The $95/share level, which served as resistance in July could make for a good support point for buys in a steeper market correction.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
