It’s become fashionable to bash Apple (AAPL) and to suggest, particularly amid Microsoft’s (MSFT) ascension to the title of world’s most valuable company, that Apple has lost its way. But has it?
There is no question that Apple's stock has suffered through a brutal past thirty days, driven by a combination of factors. Not only did the tech giant anger investors with disappointing earnings on last month, the company further spooked the market by announcing that it will no longer disclose how many iPhones, iPads and Macs it sells each quarter. These infractions have punished the stock to the tune of roughly 24% during that span.
The perception is: What is the company trying to hide by reducing transparency in its growth engine — the iPhone. It certainly hasn’t helped that Wall Street analysts, citing their so-called “channel checks” have slashed their iPhone unit sales estimates ahead of the all-important holiday quarter. Essentially, there is now a perception that the stars are now misaligned for Apple shares to make their typical January comeback.
As the market speculates about Apple's future and the long-term strength of iPhone sales, there are several reasons for investors to want to bite into Apple shares now. But for me, I’m only going to focus on two. Not to mention, the company’s fundamentals not only are intact but can be argued that they have never been stronger. Let’s evaluate Apple's risk/reward profile with a few scenarios I expect will reverse the market's near-term and long-term sentiment on Apple stock.
I expect Apple to announce blowout first quarter results in January. And in the process, the company will make analysts who recently downgraded the stock on projections of weaker sales for both the January and March quarters look foolish. Over the past thirty days, sales estimates for both the January quarter and the March quarter have been lowered.
Fears of slowing iPhone sales are par for the course. When have we not heard the term “peak iPhone” one rate past five years? It was the bearish mantra in 2015, 2016 and 2017. During that span Apple stock has soared 56%, outpacing the S&P 500 index. In this case, doubters are quick to cite data suggesting the company is selling fewer new iPhones this holiday season compared to a year ago. Meanwhile, Apple management has maintained that its recently-launched iPhone XR is currently the company’s best-selling model.
With analysts turning bearish and cutting iPhone unit shipment projections, this makes it easier for Apple to either meet or beat its January targets. And here’s the thing: Even if Apple were to have finally reached peak iPhone, it would still signal a reason to buy the stock since it’s likely that the growth peak is already priced into the stock.
At around $176 today, down from its all-time high of $233, Apple stock trades at around thirteen times fiscal 2019 EPS estimates of $13.45 per share, which is cheap compared to the S&P 500's projected earnings of 18. Assuming Apple traded on par with the S&P 500 the stock would be valued today at around $242 or almost 40% higher than current levels. That’s excellent value, especially when combined with its 1.51% dividend yield and stock buyback program.