Investors are worried about a multitude of headwinds, including the possibility of slowing iPhone unit sales, and declining economic growth in China. Fears are rising that Apple’s revenue and earnings growth may grind to a halt this year.
But long-term investors should still view Apple stock very favorably, and if anything, the recent selling pressure simply creates a great buying opportunity.
Has Apple Lost Its Mojo?
Now that Apple is significantly off its highs, it seems like a screaming buy. Apple generated 28% revenue growth and 43% earnings growth last fiscal year. Apple generated $70 billion of free cash flow last fiscal year, and returned $46 billion of it to shareholders through dividends and buybacks.
The market is instead panicking over what the future might hold, but Apple has been here before. After the post-iPhone 5 lull, Apple stock fell by half, as revenue and earnings dipped for a brief period. Investors feared the company had lost its innovative mojo.
In addition, back then investors were overly worried about competition, particularly from low-end rivals, as they are now. But once again, investors are forgetting that Apple owns the lion’s share (approximately 90%) of smartphone industry profits. It has ceded market share to Android, but Apple’s goal is profitability far more so than share. Apple management has repeatedly reiterated its goal is to sell the best products, not necessarily the most products.
Really, Apple’s stock price declines in recent years were simply a case of Apple being stuck between iPhones, as it is now. Apple may be in for two or three quarters of flat-lining sales and earnings growth, but the next generation of products will likely move the needle in a big way, as they always have.
Big Catalysts for Apple Stock
Now that the iPhone 6s and iPhone 6s Plus have reached mature stages of their product lives, it is indeed possible that Apple may report flat or declining iPhone sales this quarter, and in subsequent quarters. But investors selling because of that are making a short-term decision, and a long-term mistake. Apple stock has major catalysts ahead.
Reports that Apple is cutting iPhone production are causing headline risk, but it could simply be that the company is preserving resources in preparation for the iPhone 7. And, the pervasive fear surrounding Apple ignores the company’s other new products, including its updated Apple TV, continued penetration of the Apple Watch, as well as rumored entries into televisions and the automotive industry.
There is also the massive growth potential of Apple Pay, particularly in China, where mobile payments are booming and Apple recently came to a deal with UnionPay, the main bank card and payment firm in China. Apple has announced it will expand Apple Pay into China in 2016, as early as February. E-commerce and digital payments are growing rapidly in China, right alongside the boom in smartphone usage there.
Plus, Apple is in pristine financial condition. The stock is cheap, trading at just 10 times earnings, with a 2% dividend yield. Apple also holds $83 billion in cash and short-term marketable securities, and another $164 billion in long-term investments on its balance sheet, with $53 billion in long-term debt.
Key Takeaways on Apple Stock
While watching a stock decline in price is difficult, investors should not lose focus on what matters. Apple is a cash-generating machine. Its growth might slow down this year as it transitions to the next generation of products, and slowing economic growth in China is an added headwind.
But the long-term remains extremely bright. Apple is arguably the most valuable brand in the world, with a high degree of customer retention. People simply love Apple products, and there has been no indication that has changed recently. Selling Apple stock at a price-earnings ratio of 10 makes little sense. Instead, long-term investors should view this as an excellent buying opportunity.
DISCLOSURE: Bob Ciura personally owns shares of Apple (NASDAQ: AAPL).
This article is brought to you courtesy of Bob Ciura from Wyatt Research.