Apple (NASDAQ:AAPL) hasn’t been immune to the recent market meltdown that was led by tech stocks. AAPL stock has pulled back about 19% year-to-date (YTD) compared to a steeper 24% plunge by the Invesco QQQ Trust (NASDAQ:QQQ). The SPDR S&P 500 ETF Trust (NYSE:SPY) has fared better with a 15% drop.
Cupertino’s financial performance in the first half of the year does not warrant the kind of negative sentiment seen toward the stock. The company reported record March quarter revenue for the calendar-year first quarter. Services revenue was at an all-time high and all other hardware products, barring the iPad, turned in record revenues.
The company persisted with its massive shareholder return policy by paying out dividends and buying back stock. It has also built up a war chest with cash and cash equivalents of $28.098 billion at the end of the March quarter. Taking into consideration marketable securities, the cash position was a whopping $193 billion.
So, what drove the negative reaction to the stock?
China Spooks Apple
Apple ticked all boxes with its fundamental performance during this lean period. The only minor irritant investors had to contend with was the company’s disclosure that it will take a $4 billion to $8 billion hit from supply disruptions. Apple was not alone in facing supply woes as Covid-19 lockdowns in China were beginning to bite high-profile big techs.
China is a key supplier to the world given the cheap labor, lax regulatory requirements, and low taxes and duties. Foreign direct investments in China climbed 26.1% year-over-year for the January to April timeframe to $74.47 billion, with investments from Germany and the U.S. increasing by over 80% and 50%, respectively.
A lot has been said about diversifying production away from China. But not much progress has been made on this front. Apple has recently shifted some of its production to Vietnam and India. Additionally, it has reportedly asked its component suppliers to build manufacturing plants outside of China.
The situation in China has not only impacted production, but also demand. China is one of the key consumer markets for many high-tech goods. Apple’s March quarter results showed that revenue from Greater China — a term used to refer to mainland China, Hong Kong, Macau and Taiwan — rose a mere 3.5% year-over-year. Sequentially, Greater China revenue fell 28.9%.
In Apple’s Resilience we Trust
The Covid-19 situation is improving in China. Shanghai has lifted the months-long shutdown and Apple’s suppliers are slowly picking up their shreds.
The tech behemoth’s setback could have a transitory effect, but the company looks well set to shrug off the near-term uncertainties. Apple’s software-focused annual Worldwide Developers Conference got underway on Jun. 6. The company was expected to announce its newest operating systems, the iOS 16, iPadOS 16, and Watch OS 9.
Some also expect Apple to share more details of its mixed reality headset and the realityOS, which will likely power the device. A launch, however, is unlikely before 2023.
Apple could have at least two hardware launch events in the fall. The next iPhone iteration — the iPhone 14 — will be unveiled in late September or October. Apple analyst Ming-Chi Kuo said in a tweet in late May that the China lockdowns have not impacted the company’s shipping plan for the iPhone 14 models.
Among the variants, production of the “iPhone 14 Max is running behind, but it’s still under control currently,” the analyst said. He expressed confidence that “suppliers can work overtime to catch up with the schedule.”
Even as Apple toils hard to keep things ticking with its hardware sale, it has built up a formidable services subscription business. Paid subscriptions on Apple’s platform were at 825 million at the end of the March quarter, up 165 million over the past year. The business encompassing fitness apps, news bundles, television, music streaming and gaming should remain resilient in the wake of the economic uncertainties.
AAPL Stock Is Selling for Cheap
In all likelihood, Apple will be in for strong growth over the next 12 to 18 months, according to Wedbush analyst Daniel Ives. His confidence is based on the prospect for the iPhones:
“The stickiness of the iPhone upgrade cycle is being underestimated by investors in our opinion as we estimate that roughly 240 million of Apple’s 1 billion iPhones have not been upgraded to a new smartphone in roughly 3.5 years.”
Apple’s products may be selling for a premium, but at least its stock is well within grasp, given the pullback. The stock is trading at a trailing twelve-month price-to-earnings multiple of 22.33, slightly lower than the previous two-year low of 22.34, according to data from Guru Focus.
Apple stock jumped 30% between July 2021 and December 2021 compared to a mere 3.5% gain in the first half of the year. When the current headwinds end, there is all possibility that the stock comes back stronger.
The average analysts’ price target for Apple stock is $187.22, suggesting over 31% upside from current levels.
On the date of publication, Shanthi Rexaline did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.