Apple (NASDAQ:AAPL) stock appears to have entered another slowdown. Disappointing iPhone sales have led key suppliers to cut their profit forecasts, worrying AAPL investors. One prominent fund, Appaloosa, sold its stake in AAPL stock.
This morning, Apple stock is down an additional 2.5% on reports that the company has ordered cutbacks on iPhone production.
Despite these concerns, however, the long-term fundamentals of the stock appear undamaged. Apple stock still trades at a low multiple and maintains a double-digit growth rate. AAPL has also seen these iPhone-induced bear markets before. Once concerns over its smartphone abate, AAPL stock will begin to rise again.
Slowing iPhone Sales Remain a Challenge
To be sure, AAPL stock faces legitimate concerns. As Apple stock followers know, the iPhone constitutes the company’s most significant revenue driver, making up 59.12% of AAPL revenue as of the previous quarter. With all signs pointing to slowing iPhone sales, investors will naturally become uneasy.
AAPL stock investors must also contend with a new reality about the iPhone. Increasingly, more consumers view the iPhone as a luxury product. The $999 cost of the Apple X plays a part in this shift.
The perception that the company deliberately slows older iPhones makes that price even harder to swallow. Why spend so much money on an iPhone when they may need to replace the device in as little as 18 months? Compare this with the MacBook Air. The latest release starts at $1,199, and these devices have an expected lifespan between four and seven years.
The short life of the average smartphone will likely push consumers to much cheaper models outside of Apple’s iOS ecosystem. For example, an unlocked Moto G6 from Motorola (NYSE:MSI) retails for just under $250. While iPhone has never tried to market itself as the cheapest product, such cost differentials become too significant to ignore when lifespan becomes an issue.
AAPL Stock Will Recover
Either way, Apple must address this issue to bring buyers back into AAPL stock. However, I also think this issue constitutes a chance for investors to purchase AAPL stock at a discount. As our own Luke Lango points out, iPhone-related concerns have created buying opportunities in the past. Apple stock has fallen more than 19% from its 52-week high. However, the two previous rounds of selling induced by iPhone-related fears took AAPL down by 30-40%.
Still, analysts forecast an average annual growth rate for the next five years at 13% per year. Moreover, current earnings estimates for the upcoming stand at $13.50 per share. This takes the P/E ratio to about 14.
The previous major selloffs in AAPL stock took the P/E ratio to around 12. Hence, history indicates we will see further downside in AAPL for now. However, a 12 P/E could also serve as a sign to again judge AAPL stock by its long-term potential.
Prospective buyers should also note that Warren Buffett added to his Apple stock position in the Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) portfolio last quarter. Apple stands as Buffett’s largest holding. This position holds more than twice the value of Mr. Buffett’s second-largest holding, Bank of America (NYSE:BAC).
If this implicit endorsement from Mr. Buffett does not help, the five years of annual dividend growth and a staggering $237.1 billion in cash on hand also will induce buyers in time. For now, investors should probably watch and wait.
The Bottom Line on AAPL Stock
AAPL stock faces another bear market related to slowing iPhone sales. For this reason, prospective buyers may want to avoid AAPL for now. The high costs of the product along with a perception of a short lifespan have cut into sales, leading to production cutbacks. As a result, the stock has fallen close to bear market territory.
However, Apple has been here before, and AAPL stock has always recovered. The low P/E ratio continues to move lower, and this downturn has not discouraged Warren Buffett from buying more.
Given these attributes, AAPL stock looks like a buy today. However, considering the history of the stock, I can understand waiting until the P/E ratio falls to 12. Either way, investors have seen this movie before, and the ending will remain the same. Once the pessimism subsides, expect a recovery in Apple stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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