Apple in Unfamiliar Territory as the Dow's Caboose

Apple in Unfamiliar Territory as the Dows CabooseThrough the end of last week, Apple (NASDAQ:AAPL) was down approximately 9% year-to-date putting it in last place in the Dow-30 derby. While the year is still young, bringing up the rear is certainly not a place we are used to seeing the perennial Dow leader.

Of course, after climbing more than 80% in both 2019 and 2020, for Apple to take a bit of a breather here is not cause for alarm—and is probably a healthy thing. For a stock that doesn't encounter many corrections, this may be one of those rare opportunities to get in on the tech powerhouse before it continues to power higher.

Why is Apple Stock Down This Year?

The modest downturn in Apple shares stems from a broader repricing in technology stocks. With the market becoming increasingly concerned about the implications of higher interest rates on growth stock valuations, Apple has been one of the companies in the crosshairs.

With the exception of Alphabet, the so-called FAANG stocks are off to a slow start in 2021 after a dominant 2020 performance. And while we may still be in the early stages of a rotation from growth to cyclical value plays, these companies certainly aren't struggling to find growth opportunities.

In the case of Apple, nothing has really changed from a fundamental perspective. Its most recent earnings report beat the Street as usual on the strength of higher iPhone sales, pandemic-driven iPad and Mac demand, and increased App Store, Music, Apple TV+, and other subscription-based revenue. The balance sheet also looks as healthy as ever with a nearly $200 billion cash hoard that continues to support stock buybacks and dividends.

Granted, the company did not provide guidance due to the ongoing COVID-19 uncertainty but did say it sees top line growth ahead. One other knock-on Apple, if you can call it that, is that certain segments will likely see slower growth over the next few quarters due to some tough year-over-year comparisons. Wearables, Home, and Accessories as well as Services are in this boat.

What are Apple's Growth Drivers?

Apple is coming off a record quarter in which revenue topped the $100 billion mark for the first time. While a slowdown in growth is a legitimate concern, it would be foolish to think a juggernaut like Apple has seen its best days. There are still several growth opportunities for investors to be excited about.

The most imminent growth catalyst is iPhone 12 sales. While the much-anticipated product faced a delayed debut, early indications are that they are selling like gangbusters. Even without the benefit of a full quarter of 5G iPhone 12 sales, last quarter's $66 billion of iPhone sales surpassed consensus expectations by 10%. The reopening of Apple stores and another round of government stimulus checks should help confirm iPhone strength.

Aside from its flagship handset, Apple is showing no signs of slowing down when it comes to new product launches. It recently introduced its sixth iteration of the popular Apple Watch. Features like blood oxygen and sleep monitoring are likely to be well received by increasingly health and fitness-minded consumers in the wake of the pandemic.

This was not to be outdone by the launch of the iPad Air which has helped fortify an already strong iPad business that is seeing strong adoption in education especially in Japan and Germany.

Then there is the fast-growing Services division. While near-term results may not match up to the pandemic-driven results of past months, it remains a major growth engine. Homebound consumers spent mightily on digital goods and services last year and much of that spending went to Apple. Based on how fast the world is gravitating towards things like streaming TV, online gaming, and connected fitness, demand for Apple's growing services portfolio should stay in good shape.

 Is it a Good Time to Buy Apple Stock?

Although Apple stock has gone on a huge run since its unusual seven-for-one split of 2014, it would be reckless to get in the way of this runaway train. Apple's brand strength, revenue growth prospects, and high profit margin will likely remain a recipe for success for the foreseeable future.

Plus, after the most recent stock split, this time of the four-for-one variety, Apple's price may benefit from being more affordable to an increasingly influential army of retail traders.

The stock isn't as cheap as it was a year or two ago at close to 30x forward earnings nor is the dividend yield what it used to be. This gives Apple, which has historically traded below the average market multiple, a sizeable premium valuation. But it is a premium worth paying given the company's financial strength and diversified, less iPhone-centric growth profile.

We don't often see Apple as a Dow laggard—and probably won't for much longer.


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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Apple (AAPL)
4.8608 of 5 stars
$165.84+0.5%0.58%25.83Moderate Buy$203.34
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