Has AAPL Stock Bottomed?
Apple Inc. (NASDAQ:AAPL) stock took one of the most unnecessary market beatings last year. It was heart breaking to see Apple stock fall so sharply, even after the unholy profits it continues to generate for shareholders. Are investors expecting too much from Apple?
This is a question I’ve been thinking about a lot lately. Just to recap, the company made a record-high $18.4 billion (with a “b”) of net income off $75.9 billion in revenue. It’s buying back truckloads of AAPL stock and its dividend is a solid 2.03%. (Source: “Apple Reports Record First Quarter Results,” Apple Inc. Investor Relations, January 26, 2016.)
Imagine if a friend told you about a company that fit that description. It’s a blue chip that’s managed to keep growing while also turning a huge profit. And rather than waste that cash on frivolous acquisitions, it’s returning a ton of it to shareholders.
Without knowing the name of the company, most people would leave that conversation thinking they’d found the Holy Grail. A company that just hit record profits? And you say they have $205 billion in the bank? Surely its stock must be soaring!
No one would guess its stock had fallen 17.5% in the last 12 months. But that’s the reality we’re facing. The market has pared back expectations that Apple can keep up its stellar performance. I think the market is wrong.
The logic here is simple: a big portion of Apple’s revenue is from “iPhone” sales and the smartphone market is oversaturated. Wall Street had expected 76.5 million units to be shipped in the quarter, but Apple only moved 74.78 million.
That is, in a nutshell, why Apple stock got hammered. Investors were terrified that iPhone sales would keep underwhelming, a fear that was compounded by the lackluster performance of PC sales. Consumers are fatigued by the endless cycle of electronics.
But don’t give up hope yet. CEO Tim Cook is orchestrating Apple’s entry into a whole host of other businesses, from self-driving cars to digital payments. Considering its size, resources, and name recognition, Apple could break into almost any industry it wanted to.
Let’s not forget that Apple had 10 million paid subscribers six months after launching a music streaming service. It’ll take a little more time for “Apple Music” to have an impact on quarterly earnings, but that’s what I call rapid growth. (Source: “Apple Music Surpasses 10 Million Subscribers,” TechCrunch, January 10, 2016.)
In the meantime, Cook has an ace up his sleeve. On March 21, he’ll unveil some new products, including a new four-inch iPhone. The “iPhone 6SE” would be the first four-inch iPhone we’ve seen in three years, giving consumers a good reason to upgrade.
A lot of customers were reluctant to get the “phablet”-sized iPhones in the first place, so we could see a sharp uptick in sales when those units hit the shelves. It’s a short-term fix.
That being said, let’s circle back to the question at hand: do investors expect too much from Apple? Personally, I think they do.
Yes, slowing growth in the smartphone market is undeniable, but that doesn’t mean Apple is going to crumble. The company has already proven it can deliver record earnings in that environment, so what is the issue? This is a solid company.
Wall Street will see that when the new product lines have a big enough impact on Apple’s income statement. Until then, AAPL stock could remain undervalued.