Great Value in Apple Stock?
Apple Inc. (NASDAQ:AAPL) stock is back in the doldrums. Trading at $92.57 per share, Apple stock is approaching its 52-week low of $92.00. Is it over for the “iPhone” maker?
Well, even after tens of billions of dollars getting wiped out of its market cap, the company is far from over. In fact, the recent drop in Apple stock’s price could represent a great opportunity for investors who want to get onboard.
Let me explain.
After all the hype, valuations matter in the long run. A stock can trade at crazy multiples in the short term, but if the company’s growth turns out to be less than what people were expecting, its stock can get punished pretty harshly. When that happens, valuations go down.
In the case of Apple, valuations could work as a double-edged sword. On the down side, the company just posted its first year-over-year quarterly sales decline since 2003. Moreover, the bottom line also deteriorated. With earnings of $1.90 per share, Apple’s quarterly earnings per share (EPS) is 18.5% less compared to the year-ago period. (Source: “Apple Reports Second Quarter Results,” Apple Inc., April 26, 2016.)
But note that the news of Apple’s disappointing quarterly results also sent AAPL stock down to—dare I say—some very attractive levels. After the giant tumble last week, both the trailing price-to-earnings (P/E) ratio and forward P/E ration are at around 10X. At these prices, the value offered by the company with one of the most widely known brands in the world is hard to beat.
Speaking of brand names, one cannot forget Apple’s huge following. By the end of 2015, more than one billion active devices in the world were powered by Apple. (Source: “Apple Reports Record First Quarter Results,” Apple Inc., January 26, 2016.)
What this means is huge monetizing opportunities. With such an enormous userbase, it should come as no surprise that Apple’s services have been booming. In fact, the segment is now a crucial part of the company’s business.
In the most recent quarter, Apple’s services revenue surged 20% year-over-year. At $6.0 billion, the segment is also the company’s second-largest revenue source, only behind the iPhone. (Source: “Apple Inc. Q2 2016 Unaudited Summary Data,” Apple Inc., April 26, 2016.)
In the earnings call, Apple CEO Tim Cook gave a few more details on this fast-growing segment. He highlighted “Apple Store,” which grew its revenue by 35% to beat last quarter’s all-time record. “Apple Music” was another strong performer. With less than a year since its launch, Apple Music has reached over 13 million paying subscribers. (Source: “Apple Timothy Donald Cook on Q2 2016 Results-Earnings Call Transcript,” Seeking Alpha, April 26, 2016.)
The best part is that the services business is not bound by product upgrade cycles and could grow on its own.
“Those one billion-plus active devices are a source of recurring revenue that is growing independent of the unit shipments we report every three months,” said Cook. “In fact, the purchase value of services tied to our installed base was a record $9.9 billion in the March quarter, up 27% over last year, accelerating from the 24% growth rate we reported in the December quarter.” (Source: Ibid.)
The Bottom Line on AAPL Stock
And let’s not forget what Apple can do with its giant cash pile. While most of that pile is still stored overseas, the company does have a decent capital return program in place. Last week, Apple expanded the total size of its program from $200 billion to $250 billion, and extended the timeframe by four quarters to March 2018.
Sure, Apple stock looks down-and-out, but it’s in these situations that value finally starts to come out. If you believe in what the company has planned for the future, AAPL stock is worth a serious look.