Since Apple’s epic, late-2018 stock decline, its stock has come roaring back. But the market still doesn’t know how to value Apple, which still makes it a great opportunity.
Very rarely, in fact never have I made a “call” in this blog, until January 2019 when I wrote about Apple’s epic end of year stock decline. However, my purpose in doing so was not to establish my bona fides as a stock picker, though my words do appear highly prescient in retrospect. Anyone who follows my blog knows I take every opportunity to point out when market participants (the herd), prognosticators and the media get it wrong and this was a golden opportunity.
You’ll recall that Apple stock tumbled wildly from its September 2018 high, falling nearly 40% to a low of $142 on Jan 3 of this year. Stocks sometimes do that; however, never has one company shed nearly a half trillion dollars – more market cap than the combined values of nearly all of the other companies in the S&P 500 – in such a short period of time. That’s what made this stock decline truly epic and, as I suggested, such a rare opportunity.
Since then, Apple’s stock has roared back. At the beginning of May, Apple was up nearly 35% for the year. The stock has since slid back due to the tit-for-tat tariff tiff between China and the U.S. At $189 as of May 17, the stock is 20% off its September 2018 high. Yet, despite the tightening of the China market, Apple is fundamentally the same company it was last September.
The Market Still Doesn’t Get Apple
In that January blog post, I wrote: “By most measures, a company with Apple’s low PE, dominant market position, strong cash position, and relative earnings strength, is considered undervalued. Using Touchstone Capital’s three valuation models, we find Apple stock to be selling at a discount of between 26 and 48%. In the final analysis, Apple’s stock did not overshoot on the upside, and the sell-off looks to be unwarranted.”
I argued then that the market has never really figured out how to value Apple. It has never been valued like any of its peer companies, which operate at price-earnings ratios more than double that of Apple’s. The market is intently focused on Apples iPhone sales, which have shown signs of weakening and will most certainly be impacted by tariffs. While revenue from iPhone sales is contracting for the moment, Apple is still sitting on the largest upgrade market in the world.
But the market ignores the fastest growing and most lucrative component of Apple – services. Services revenue hit an all-time high of $11.5 billion in the second quarter of 2019. When the market understands that this represents recurring revenues, which are currently growing at 26% annually, with above average margins, it will recognize Apple for the value stock that it is.
Which Means Opportunity for Investors
Following its steep price decline last year, Apple was deeply undervalued. It’s still undervalued today. Let the market worry about tariffs, which it will. While you can expect short-term price volatility, Apple’s stock will eventually reflect the company’s elite ability to grow its free cash flow and invest in technological advances.
I may never make another stock call again. But, if I do, it will be to call out the conventional wisdom, which is almost always wrong. In Apple’s case, the stock swoon in late 2018 was reflective not of Apple, but of a general and unwarranted downturn in the market at large. Such an epic decline spelled opportunity for the Intelligent Investor armed with the right information and the discipline to use it.
