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Is it Time to Take a Bite Out of Apple?

Posted on Thursday, July 11th, 2019 by Chris Markoch

Apple is under intense scrutiny that is creating a polarizing outlook among analysts. The ongoing trade war with China is causing a current and projected decline in iPhone sales, which is making it difficult for the tech giant to convince stock analysts that their nearly unparalleled growth will continue. The iPhone has been a cash cow for over a decade, but to support its robust sales growth the company needs access to China. On the flip side, Apple’s stock has been among the best performers in 2019. So which Apple can investors expect for the rest of 2019 and beyond? To answer that question, let’s take a look at some of the pros and cons of Apple’s stock.

Investors can still make a powerful case for Apple

One reason why Apple still is a compelling stock is that they have Warren Buffett in their corner. Buffett remains one of Apple’s key advocates. The chairman and CEO of Berkshire-Hathaway currently owns about 5 percent of Apple and has said he may increase his holdings if the price is right. Buffett claims Apple has a great product with sound management. Few companies can hope to get as good of an endorsement as that.

But beyond the cache of a Warren Buffett endorsement, the stock price is showing solid fundamentals … for now. The tech giant is still up for the year – 25 percent to be exact which is currently besting the S&P 500 which has posted an 18% gain. The fact that the rebound comes after Apple stock suffered a big decline in the second half of 2018 gives further credibility to the pro-Apple argument. Bullish analysts also cite an improvement in the global market and economic conditions, and a stabilizing iPhone business including signs that iPhone demand in China is increasing.

But the real feather in Apple’s cap may be their Services business. So far in 2019, this important part of their business has posted an 18% growth in revenue. The Service’s sector includes Apple’s suite of software subscriptions such as Apple Music, News+, Arcade and more. Apple is also set to launch a new streaming service, Apple TV Plus that will feature original content. For those that feel the streaming market is becoming saturated, consider those existing players such as Netflix continue to increase the price of their base service and have not been losing customers. There’s room for more competition and Apple has a solid base with its existing Apple TV users. When you factor in that Apple’s Services business operates with much higher gross margins than the Products business (63%-33% so far in 2019) and the fact that the Services business is growing faster than the Products business, there is a fundamental case for an increase in overall gross margins and, subsequently, profit.

However, there are some bad apples in this bunch

Analysts have solid reasons to believe Apple’s stock may take a hit for the remainder of 2019. There are a few reasons for this belief:

  1. The blessing and the curse of 5G - 5G is the transformational tide that should lift all wireless companies. The question is when? For Apple, the shot in the arm from a 5G iPhone won’t happen until the product is released in 2020. That makes sense. If you’re due for an upgrade, why would you buy a phone in 2019 when you can wait until 2020 for the 5G version? That bodes poorly for iPhone sales to continue their resurgence in the back half of 2019. Apple’s stock and iPhone sales are a near-perfect correlation.
  2. Apple’s stock is overvalued – Apple’s current forward-earnings multiple is a robust 17.5. That is substantially higher than their five-year average of 14. A multiple of this level is not new for Apple, but every time it has hit this multiple, it has indicated a point of resistance.
  3. China is a story that isn’t going away – China accounted for approximately 20 percent of Apple’s revenue in 2018. Although there are some signs that Chinese demand has been on the rise, the longer the trade dispute remains in the news, the higher the probability that Chinese economic expansion will slow. The world’s most populous country suffering a demand in consumer confidence is a dangerous one-two punch for Apple’s stock.

Is this the beginning of the end for Apple?

If you look at Apple through the lens of an investor, the company still makes a lot of sense to own both now and in the future. But if you look at Apple as a trader, now may not be the time to buy. With the other FAANG stocks (Facebook, Alphabet/Google, and Netflix) all performing better, there are other options in the tech sector for 2019. Now, if Apple’s stock declines significantly that may be a signal for you to grab shares while they are on sale.


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