With Apple’s (AAPL) business model being caught in the crosshairs of the nasty U.S. versus China trade battle, the tech king’s stock may still not be cheap enough to buy from a valuation perspective even after a vicious selloff.
“I am hesitant to say this is the bottom [for Apple] — we have not seen valuation stabilize,” Erin Gibbs, equity chief investment officer at S&P Global Market Intelligence, said on Yahoo Finance’s The First Trade.
While Gibbs remains generally upbeat on Apple longer term owing in part to its ability to drive sales from new services such as content streaming, but the headlines on trade are too negative at the moment. “We can still see several weeks as we head into the summer doldrums of Apple going down even further,” Gibbs cautions.
On the surface, Apple’s stock seems relatively attractive.
The stock trades on a price-to-earnings ratio (PE ratio) of 14.6 times forward Wall Street profit estimates, per Yahoo Finance data. That’s below the forward price-to-earnings multiple on the Dow Jones Industrial Average and S&P 500 of 15.7 times and 17.2 times, respectively. It’s also toward the low end of the range of Apple’s PE ratio of the past 11 years (roughly 10.5 times to 38.5 times).
But with the Trump administration rattling its saber at China on the tariff front, Apple’s exposure to the country could require analysts to slash their future profit forecasts. The call: slowing sales in China and higher production costs. In effect, that means Apple’s stock is probably still overvalued currently despite a fresh plunge.
Remember, Apple derived $51 billion in sales from its “Greater China” segment in the fiscal year ended September 29, 2018. The segment represents Apple’s third-biggest region, behind the Americas and Europe. Apple has hundreds of suppliers in the country churning out the latest tech gadgets from the company.
Indeed investors have made the connection on the possible earnings risk to Apple.
Apple’s stock has tanked about 10% over the past month, according to Yahoo Finance data as trade war fears hammer scores of corporate giants overly reliant on China for their business. As Yahoo Finance’s Scott Gamm pointed out on Tuesday, Apple stock’s is in bear market territory — down nearly 20% from early October 2018 highs.
“When there is this much uncertainty around non fundamental catalysts such as trade, it’s a little bit hard to make a call on valuations [bottoming]. Our view is that trade is very important,” said UBS strategist Stuart Kaiser on tech valuations.
“With these headlines, there is definitely more room for it [Apple] to go down,” said Gibbs.
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