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Apple Stock Is Undervalued, but It’s a Tough Road to Upside

Thomas Niel

Apple (NASDAQ:AAPL) stock is up nearly 36% year-to-date. Shares currently trade around $211, and are moving closer to their all-time high of $233.47. But with looming trade risks and slowing growth, how can AAPL move the needle?

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With a nearly trillion-dollar market cap, shares are not going to double anytime soon. But can investors expect material upside in AAPL stock? Let’s take a closer look, and see if investors can find opportunity in Apple stock today.

Recent News For Apple Stock

Apple announced earnings on July 30. Sales growth was minimal year-over-year. Revenue for the quarter ending June 30, 2019 was $53.8 billion, up slightly from $53.3 billion in the prior year’s quarter. With product sales down 1.7% YoY, service revenue was responsible for the minimal revenue uptick. Service revenue for the quarter was $11.5 billion, up 12% YoY. With smartphone sales in decline, AAPL stock needs new revenue sources to sustain growth and move the needle.

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A new product mix could help jolt up sales. Take “wearables” such as the smartwatch. Apple controls 25.8% of the market. Apple does not breakdown sales. But CEO Tim Cook remarked on the conference call that Apple had an “absolutely blowout quarter for Wearables.”

The wearables market provides significant runway, as the product has yet to reach critical mass. All bets are off whether these new products can replace declining iPhone sales. But, at the very least, they can help the company sustain its current product revenue.

But how about the elephant in the room? I’m talking about the U.S.-China trade war. Looking beyond the headlines (and the tweets), how does the geopolitical situation impact Apple? While the company received a reprieve from looming tariffs, long-term dependence on China for manufacturing remains a material risk.

Trade War Risks to AAPL Stock

With the U.S.-China trade war continuing, Apple stock is caught in the middle. With the US.. placing a 10% tariffs on imported electronics, the company could experience headwinds. Luckily for Apple, the 10% tariff has been delayed until Dec. 15. This will prevent new tariffs from impacting sales during the holiday season. This proposed tariff could be prevented if the U.S. and China settle their disputes and negotiate a new trade deal.

The trade war underscores the risk of Apple’s Chinese manufacturing dependence. But Apple has options when it come to hedging against this geopolitical risk. The company is exploring ways to move iPhone manufacturing to other low-cost Asian markets. In fact, with wages rising long-term in China, this move is inevitable. Potential countries include India, Vietnam, and Malaysia.

While this is a step in the right direction, moving production is not a one-step process. It takes time to develop the right outsourcing infrastructure. But it is a positive sign that Apple is taking proactive steps.

How does this factor into the valuation of Apple stock? Let’s see if AAPL stock is truly undervalued, or fairly priced given the risks and opportunities.


AAPL Stock Valuation

As I mentioned in my previous article about Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Apple sells for the lowest valuation of the “FAANG” stocks. Stagnant growth and size may justify this discount. Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Netflix (NASDAQ:NFLX) continue to show considerable runway.

But Apple is in the similar boat as Google: both companies have more cash than they can reinvest in the business. What does that mean for AAPL shareholders? The company needs to consider aggressive buybacks and dividends to move shares higher.

The company bought back $17 billion worth of Apple stock last quarter. Based on the most recent financials, the company has over $210 billion in cash and marketable securities. The 2017 tax bill made it easier for Apple to repatriate its overseas cash hoard. Aggressive share buybacks and dividend increases would help improve the Apple stock price. Acquisitions could be another way Apple can generate growth. Apple’s 12-figure war chest provides multiple pathways to boost the share price.

Bottom Line on Apple Stock

With shares trading at a forward price/earnings ratio (forward P/E) of 16.6, Apple stock is a bargain compared to its big tech peers. But slow growth and trade risks justify this discount. Nevertheless, there are emerging trends that could help jump-start growth. The wearables market has plenty of runway, allowing Apple to use smartwatch sales growth to counter iPhone sales declines.

The U.S.-China trade war is far from over. But the current Apple stock price takes into account these risks. With the company looking for ways to diversify manufacturing geographically, the long-term China risks could be mitigated.

But does all of this mean AAPL is a buy? For investors looking for a blue chip at a fair price, Apple stock could be a buy. But given the specter of a stock market correction in the near future, it may pay to wait before taking a position.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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