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Long Term Investors Should Ignore the Noise About Apple Stock

The bad news keeps piling on for Apple (NASDAQ:AAPL) shareholders. This week alone, Apple stock has been hit by problem after problem.

There were rumors that management is considering promotional tactics to sell more iPhones, yet another weak earnings report from a smartphone supplier, a report that Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are working on their own headphones to compete with AirPods, and a UBS survey that indicated that iPhone purchasing intent is at a five year low.

Meanwhile, the one good thing Apple had going for it, a ninety day trade war truce between the U.S. and China, has been overshadowed by U.S. President Donald Trump calling himself “Tariff Man” on Twitter (NYSE:TWTR) and a part of the yield curve inverting which has investors selling stocks in bunches.

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All together, selling pressure in AAPL remains as strong as ever. The stock is now 25% off recent highs, and nearly back to its late November lows.

Near Term Headwinds Are Just Noise

Long term investors would be wise to ignore all this noise. Make no mistake, that’s all this is right now for Apple stock: noise.

Long term, Apple remains one of the most valuable and resilient consumer facing companies in the world with an ecosystem of unparalleled size and a user base of unparalleled loyalty. Revenues are big. Profits are big. Cash flows are big. Buybacks are big. The dividend is big. The balance sheet is big. And the stock’s valuation is low.

Ultimately, then, recent weakness is a buying opportunity. That doesn’t mean Apple stock will bounce back right away. Rather, near term weakness is here to stay. But, eventually, this weakness will end. When it does, Apple will reclaim its $1 trillion valuation, and then some.

There are two big things which have weighed on Apple stock over the past several weeks. Those headwinds are as follows:

Slowing iPhone sales. Bigger tariffs and rising costs.

These headwinds are nothing more than noise. To be sure, noise can create material weakness in a stock. The sell off in Apple over the past few weeks isn’t unwarranted. Rather, you had a stock trading an all time high valuation that needed perfection to work. You didn’t get perfection, so now, the stock is dropping.

This all makes sense. But, in the big picture, the catalysts behind this sell-off amount to nothing more than noise.

Slower iPhone sales? Noise, because no one is switching out of the iPhone ecosystem, iPhone average selling prices are going up, and margins are trending higher, too. Plus, you have a burgeoning new hardware business led by Apple Watch and AirPods and a red hot software business, the sum of which should produce enough growth to offset slowing iPhone unit sales growth.

Trade war headwinds? Noise, because eventually and inevitably, the U.S. and China will agree to end the trade war. While a resolution will take time to reach, it does appear that both sides are finally willing to negotiate more openly, given that the trade war is having adverse affects on both the Chinese and American economies and stock markets.

No one wants this pain to persist, least of all Trump and Xi, so a resolution should be reached rather soon, thereby ending what is currently very loud trade war noise.

Thus, in the big picture, near term headwinds are just noise. Long term, AAPL will head way higher from here, powered by a stable old hardware business (iPhones, iPads, and Macs), a burgeoning new hardware business (Apple Watch, AirPods, HomePod, and Apple TV), and a rapidly growing software business (App Store, iTunes, iCloud, and Apple Music).

Patience Is the Key for Bulls

In the big picture, recent weakness in AAPL is nothing more than a long term buying opportunity. But, that doesn’t mean this sell off will end any time soon. Instead, history suggests Apple stock will remain weaker for longer before bouncing back.

Apple stock has had two major iPhone slowdown induced drops this decade. The first was in 2012-13. The second was in 2015-16. During both sell-offs, Apple stock dropped more than 30% off recent highs, the sell-off lasted for several months, and the stock didn’t bottom until the P/E multiple hit 10.

In context of those numbers, this current sell-off in AAPL still has a ways to go. The stock is just 25% off recent highs. This sell-off has lasted about two months. And, the P/E multiple is up at 14.

To be sure, Apple’s fundamentals today are much better than back in 2012-13 or 2015-16. Back then, this was exclusively an iPhone business, and not only were iPhones the bulk of revenues and profits, but they were also the big growth driver.

Today, iPhones are still the bulk of revenues and profits, but they are far from being the biggest growth driver. Instead, Apple’s growth is coming from Apple Watch, AirPods, and its multi-faceted Services business.

Due to enhanced diversification, this sell-off in Apple stock shouldn’t be as bad as the 2012-13 and 2015-16 sell-offs. In particular, the P/E multiple likely won’t fall down to 10, and you likely won’t get a 40% drop like what happened in 2012-13. But, a 30% sell-off that ends in a few months seems quite reasonable.

From this perspective, it looks like AAPL may be near the bottom. As such, this looks like a good time for long term investors to gradually start buying into the dip.

Bottom Line on Apple Stock

Long term investors would be wise to regard near term headwinds as nothing more than noise, and take advantage of recent weakness to gradually buy into the dip.

As of this writing, Luke Lango was long AAPL, GOOG, and AMZN. 

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