Investors in Apple (NASDAQ:AAPL) must have missed the memo announcing the red-hot stock market of the past few months. Despite its status as the world’s most valuable company, AAPL stock gained less than 1% while the Nasdaq Composite index gained 9.5% in the past three months, leaving investors to scratch their heads.
Anytime Apple hits a bump in the road, I see the same old bearish arguments start to pop up. The smartphone market is saturated. Apple’s $1.98 trillion market capitalization is too big. Revenue growth is slowing.
Apple is certainly not the growth stock it once was. But as growth has moderated over the years, the iPhone maker has transitioned to a cash cow, blue-chip company. To me, the biggest reason Apple shares have struggled in recent months is because of the crazy run– up 147% — it went on over the 12 months to the end of August 2020.
Nothing has changed about the long-term Apple bull thesis. Investors just need to give the stock time to take a breather before the rally resumes.
AAPL Stock Bull Case
One of the hallmarks of a great blue-chip stock is that its bull case is boring. I mean “boring” in a sense that it doesn’t fluctuate. When it comes to Apple, the bull case has been the same for years. Apple has a massive and growing customer base of iPhone and other device users around the world. The company generates an insane amount of profits, including net income of $12.6 billion last quarter.
Apple is pivoting to a service-heavy model, which will further reduce volatility in its business and boost margins. At the same time, Apple has an unparalleled $191.8 billion in cash that it has pledged to spend on dividends, buybacks and other investments in coming years.
In the near-term, the 5G device upgrade cycle should be a major boost for Apple’s numbers. In addition, Apple recently launched its first generation of internally produced M1 Processors in its MacBooks.
“AAPL’s ongoing commitment to return significant cash to shareholders will continue to provide stability in volatile markets and enhance the stock’s total return,” Tigress Financial Partners analyst Ivan Feinseth told clients last week.
It’s not exciting. It’s not new. But the long-term Apple bull thesis is alive and well.
Why Is Apple Lagging?
A reasonable question to ask at this point would be: if Apple is so great, why is the stock down nearly 8% in the past three months? To me, Apple’s recent weakness is all about valuation. In the past three years, Apple’s trailing 12-month earnings per share are up 34%, which is very impressive. In that same stretch, its trailing 12-month revenue is up 14.7%, another impressive feat for a company the size of Apple.
However, over that three-year period, Apple’s forward price-to-earnings ratio is up 66.9% and its forward price-to-sales ratio is up 69%. These two metrics obviously fluctuate on a day-to-day basis. But theoretically, they should remain relatively stable for a stock generating the type of steady performance that Apple does.
Personally, I believe investors got a little bit too enthusiastic about the 5G upgrade cycle and they bid up Apple’s shares a bit too high in early 2020. Apple shares rallied 84% from July 1, 2019 to July 1, 2020.
The good news for investors is that the enthusiasm for Apple is nothing like the irrational exuberance happening in the electric vehicle space, for example. Apple’s P/S multiple is now 7.1x compared to 17.9x for Tesla (NASDAQ:TSLA).
I’m not predicting the Apple sell-off will continue in any meaningful way in the next several months. But I wouldn’t be surprised to see Apple lag the S&P 500 index for the next couple of quarters while its business catches up to its valuation.
How To Play Apple
In previous years, I’ve said Apple has staggering cash flow, aggressive capital returns, near- and long-term growth opportunities and an attractive valuation. Today, the only thing I would alter about that description would be to change the word “attractive” to “reasonable.”
If you’re a short-term trader looking for a big pop in the next couple of months, Apple is probably not the best stock to buy today. If you are a long-term investor, Apple is definitely headed higher at some point. But you may need to continue to be patient for a while.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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. He 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.