Apple Inc. (NASDAQ:AAPL) stock just lost more than $40.0 billion of market cap in a few hours. To give you some perspective, that’s more than the entire market cap of Tesla Motors Inc (NASDAQ:TSLA)!
Billions Wiped Out in a Few Hours
But before you jump on the bearish bandwagon for Apple stock, keep in mind what billionaire investor Warren Buffett told us: “Be fearful when others are greedy and greedy when others are fearful.”
Of course, Apple stock is not down for no reason. The company just posted a disappointing earnings report.
For the quarter ended March 26, Apple generated $50.56 billion in revenue. The number is not only down 12.8% year-over-year, but also lower than Wall Street’s expectation of $51.97 billion. (Source: “Apple Reports Second Quarter Results,” Apple Inc., April 26, 2016.)
The bottom line didn’t help either. Apple generated a quarterly net income of $10.5 billion, translating to $1.90 per share. This shows a sizable 18.5% decline in earnings per share (EPS) compared to the year-ago period. Moreover, it also missed analysts’ already-low EPS estimate of $2.00.
What really changed the sentiment towards AAPL stock was not the numbers themselves, but how they fit into the company’s historical financial records. For more than a decade, Apple’s growth in revenue and earnings had been more than impressive. This time, though, the upward trend is broken. Tuesday’s earnings report marked the first year-over-year quarterly sales decline since 2003.
As you would expect, the cause of Apple’s disappointing performance was its main product—the “iPhone.” In the quarter, the company sold 51.2 million units of iPhones, a whopping 16% less than what it sold in the same period last year. Unsurprisingly, revenue from iPhone sales declined 18% year-over-year.
Note that iPhone sales are still Apple’s biggest revenue driver. Even after its double-digit decline, it still made up 65% of the company’s total revenue.
That being said, analysts were already expecting this to happen. So fundamentally, things haven’t changed that much. Moreover, the same thing that brought down Apple stock might also send it back up again.
Sure, iPhone sales were bad. But that’s because the product is due for a major update. And the new version—the “iPhone 7”— is expected to be released this September. Instead of buying the current flagship model, consumers might be waiting to get the new one later this year.
Also, the new product is going to come at the right time. The last major update was the “iPhone 6,” which was released in September 2014. By the time the iPhone 7 becomes available, many of those who bought the iPhone 6 on a two-year contract from carriers will be eligible for an upgrade. This means iPhone 7 sales could be, in a word, huge.
And let’s not forget one segment that is often overlooked in Apple’s earnings: services. Last time Apple reported, the company’s services revenue surged 26% year-over-year. Moreover, by January 2016, Apple’s active installed base had surpassed one billion. (Source: “Apple Reports Record First Quarter Results,” Apple Inc., January 26, 2016.)
The good news is that the trend is continuing. Yesterday, Apple announced that revenue from services has increased 20% year-over-year to $6.0 billion. If Apple’s services can continue going strong, it could offset the potential downturns in other segments.
The Bottom Line on AAPL Stock
At the end of the day, keep in mind that after the drop, Apple stock has a price-to-earnings multiple of less than 11X and a decent dividend yield of 2.11%. For those who believe in the company’s long-term outlook, it might be worthwhile to look at AAPL stock right now.