Apple Stock Needs to Declare Independence From iPhone Dependence
Apple (NASDAQ:AAPL) cannot escape the negative sentiment surrounding its iPhone. The company began the year on news of an iPhone-induced revenue miss and a 7.5% decline in Apple stock. It won one of its court cases against Qualcomm (NASDAQ:QCOM) regarding their ongoing patent dispute. However, the company has seen little else to celebrate as iPhone revenues continue to take a beating.
Still, amid the bad news, investors should remember that AAPL stock holds the largest cash hoard in corporate America. Even if AAPL languishes in the near term, the recent decline should eventually become a lucrative buying opportunity as the company works to replace lost iPhone revenues.
Apple Stock Finally Received Some Good News
News regarding the iPhone and rumors that Intel (NASDAQ:INTC) has pursued its SVP of hardware development has dominated the headlines on Apple stock recently. Still, AAPL got something it has not received in a while — good news.
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A court in Germany dismissed a patent suit against Apple by Qualcomm. The court ruled Apple had not infringed on Qualcomm patents. This represents the first win for Apple in a series of patent suits Apple launched against Qualcomm in many countries.
Although this boosts morale for Apple, it does not change the fact that the Apple-Qualcomm relationship has suffered irreparable damage. Apple has moved on and produces its latest iPhone models without Qualcomm chips. Hence, I question whether this will have a lasting effect on Apple stock.
Lower iPhone Revenues Could Become Permanent
It also does not change the fact that AAPL stock will probably have to adjust to the reality of lower iPhone revenues. The iPhone accounted for over 59.1% of Apple’s sales in the fourth quarter. This means Apple’s fortunes rise and fall with the iPhone. The recent revenue miss also hints at what will likely come. Moreover, as my colleague Brad Moon points out, “batterygate” could have contributed to this decline. More customers than expected rushed to take advantage of $29 battery replacements, delaying the need for a new iPhone.
Still, that may have actually kept more customers in Apple’s iOS ecosystem. Yes, aging phones and the rise of 5G will eventually force some future upgrades. However, consumers can now find unlocked phones for a much lower cost in the Android ecosystem. Sometimes, these phones sell in the $200 range for a company’s latest release. The lowest-cost model of the newest iPhone costs no less than $749. Many higher-end models retail for over $1,000. Given that cost differential, one has to expect that Apple will lose more iPhone users in the coming years.
Do Not Count Apple Stock Out Yet
Despite this decline, investors should also remember that few companies have more ability to redefine themselves than Apple. The company’s $237 billion in cash creates numerous options. If Apple cannot invent its next revenue source, it can buy it. Former CEO John Sculley believes that Apple will become a gamechanger in the healthcare industry. Its advances with the Apple Watch point in that direction.
Whatever the source, cash-rich companies such as archrival Microsoft (NASDAQ:MSFT) have shown an ability to come back after sales fell in their core product. One has to assume Apple can engineer a similar comeback amid an iPhone revenue decline.
Apple stock has also reached a compelling multiple. The price-to-earnings (P/E) ratio stands at just over 12.8. Looking back over the past ten years, the average annual P/E has never fallen below 11.4.
That low might explain why Apple bounced off of the $142-per-share low it saw on Jan. 3. In the two weeks since that time, Apple stock has risen by about 9%. Time will tell if that low forms a more permanent bottom. However, for now, AAPL has stopped falling. If healthcare or another business turns into a revenue catalyst, AAPL stock should return to growth mode.
The Bottom Line on Apple Stock
Apple stock has dealt with declining revenues in its core product in recent months. However, Apple’s ability to reinvent itself could ultimately rescue AAPL.
Yes, winning one lawsuit against Qualcomm boosts morale. However, it does not change the fact that falling iPhone revenues have severely damaged Apple. Although AAPL stock bounced off of a recent low, the company may struggle to gain traction in the near term.
However, the P/E ratio of Apple stock has begun to flirt with multi-year lows. The company also holds the largest cash position in corporate America, giving the company numerous options.
AAPL could languish for some time to come. Still, with its low multiple and its large cash position, Apple stock has become a buying opportunity in need of a catalyst. Investors should treat it as such.
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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