Apple Stock a Bargain After Brexit
Like most tickers in the tech sector, Apple Inc. (NASDAQ:AAPL) stock fell after Britain voted to leave the European Union (EU). However, Mr. Market is not always rational. For those investors looking for value in today’s bloated stock market, the pullback in Apple stock could represent a great potential opportunity.
Let me explain…
Uncertainty prevails in global markets right now. Investors are worried about Europe’s economic outlook as the Brexit took a 52:48 victory in the referendum. Since the world economies are all interconnected these days, uncertainty in Europe is sending shockwaves across the globe. No doubt there is a real concern that as one of the biggest multinational companies in the world, Apple’s future business could be affected.
However, the slip in Apple’s stock price could simply be a result of markets turning to “risk off” mode. The NASDAQ Composite Index fell by 4.1% on Friday, with sizable losses in almost all big-name tech stocks. Alphabet Inc (NASDAQ:GOOG) was down 3.8%, Amazon.com, Inc. (NASDAQ:AMZN) slipped 3.1%, and Microsoft Corporation (NASDAQ:MSFT) dropped four percent. So Apple stock actually outperformed its peers on the Brexit news.
Of course, when you look a bit further back, you’d see that Apple stock is still deep in the doldrums. Trading at $92.01 on Monday morning, AAPL shares are down more than 30% since they reached $132.97 apiece last July.
Note that the downturn in Apple’s stock price also brought down its valuations. The company is trading at just above 10 times its earnings. Moreover, Apple also pays dividends with an annual yield of 2.44%.
The reason behind Apple stock’s giant plunge was the company’s weakened outlook. In today’s market, many tech companies are reporting solid growth, yet their stocks can still get killed. It’s no surprise then that when Apple reported its first year-over-year revenue decline in 13 years, investors ran away.
The fact investors forget is that Apple is not your ordinary tech company.
You see, one of the biggest differences between Apple and many other tech companies is that while others are painting vivid pictures for the future, Apple is already delivering the growth that it once promised.
In the company’s fiscal 2015, Apple generated $233.7 billion in net sales and earned $53.4 billion in net income. Both numbers dwarfed that of pretty much all its competitors. (Source: “Form 10-K,” Apple Inc, October 28, 2015.)
The concern now is that Apple’s business—and, in particular, “iPhone” sales—are about to decline. In fact, they already did. In April, the company reported its first year-over-year revenue decline since 2003. The biggest contributor to Apple’s revenue, iPhone sales shrunk 18% year-over-year. (Source: “Q2 2016 Unaudited Summary Data,” Apple Inc., April 26, 2016.)
Still, the decline in iPhone sales in the reporting quarter could be a result of consumers waiting for the “iPhone 7” to launch in September. Note that many people bought the “iPhone 6” on a two-year contract in September 201; the timing of the expected release of the new iPhone means many consumers will be eligible for an upgrade.
But what if the Apple stock bears are right and the iPhone turns out to lose some of its appeal. Well, in that case, I believe the company will still be fine.
Suppose that iPhone sales are permanently lower than before. Let’s assume that it results in a 20% decline in yearly revenue (the recent 18% drop in iPhone sales resulted in a 12.7% decline in quarterly revenue). And let’s further suppose that the effect on the bottom line is more severe, at 25%. Given that Apple earned $9.22 per share in fiscal 2015, a 25% drop would mean Apple is going to earn $6.92 per share.
How do the valuations look? Well, with annual earnings per share EPS of $6.92, Apple stock would carry a price-to-earnings multiple of 13.3X—not a high number by any standard.
The Bottom Line on AAPL Stock
What this means is that even with a slashed outlook, Apple stock is still not expensive. And I haven’t even mentioned Apple’s development of driverless cars, its booming software segment, or its other secret projects.
There are plenty of companies whose outlooks are not nearly as good as Apple’s, yet they trade at much higher multiples. At today’s price, investors could be getting a bargain on what they pay for each dollar of earnings with a pick like Apple stock.