Despite being one of the heralded FAANG stocks, Apple (NASDAQ:AAPL) stock doesn’t get valued like one. After the recent pullback in May, AAPL stock is trading at just 15 times its earnings.
Many consider Apple to be a consumer stock as opposed to a technology stock, but even with the company’s pivot toward services, it’s still operating in the tech world. Its main product in hardware is a smartphone (it also makes smartwatches) and its streaming and television service offerings primarily utilize digital technology.
However, even if we call Apple a consumer company, it’s difficult to understand why AAPL stock is trading on par with very traditional consumer cyclical stocks like PepsiCo (NASDAQ:PEP).
I have been skeptical about Apple before, but valuation changes things. After the decline of AAPL stock price, investors can own shares of a great company for a reasonable price.
Investing Alongside the Best
Purchasing great companies at fair prices has been an investing philosophy that has worked quite well for legendary investor Warren Buffett. He is Apple’s second-largest shareholder through his company, Berkshire Hathaway Inc. (NYSE:BRK.A).
In an interview in late February, Buffett said that, “If it [AAPL stock] were cheaper, we’d be buying it. We aren’t buying it here.”
Apple stock price is now getting close to the mid-$170 range, where AAPL stock was trading in February. It’s worth keeping an eye on AAPL stock to see if the shares slide further. If they do, it could be a great buying opportunity for investors.
Because of the valuation of Apple stock, AAPL stock does seem to be a value-type name. But there is good reason to believe that, while AAPL won’t match the growth stats of the Jobs era, there are a few catalysts that could rev up Apple’s numbers in the coming quarters.
Apple Shifts to Services
After Apple’s quarterly revenue declined 5% last quarter, Apple is determined to reverse that trend by focusing on its Services business.
Apple’s Services revenue has already hit all-time highs. And in the wake of the release of new products like Apple News+ and Apple TV+, there are new levers for Apple to pull.
That said, Apple isn’t completely giving up its bread and butter. It’s finding new ways to better monetize its existing products, helping to lift its top line. Juicier growth numbers may be coming from the Services business, but there is still money to be made in hardware.
For example, after four years, Apple finally redesigned and repriced the iPod Touch. iPod Touch prices start at $199 (compared to $329 for the basic iPad). It’s a great starter product that gets consumers hooked on AAPL’s new services. That may not get investors excited, but it demonstrates the positive incremental changes the company is making. A lot of little revenue boosters like that could end up making a big impact on Apple’s profits.
The Bottom Line on AAPL Stock
Tim Cook’s legacy is on the line. This is the year that Apple stock price either stalls or breaks higher. In the next couple of quarters, investors will see just how much the new services are contributing and how much traction they are gaining with customers. Apple TV+ , which rolls out in the fall, could help reinvigorate AAPL stock.
The fact is that Apple still has an incredible brand, and there is reason to believe that some of the worst is behind the company. Mispricing missteps have been corrected and AAPL is adopting new measure that should boost its growth. China could still be a stumbling point for AAPL, but at its current valuations, Apple stock probably prices in fallout from the Trade War.
Trading at 15 times earnings with a number of new products in the pipeline, AAPL stock looks attractive.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
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