Management warned of weak demand for iPhone sales through June, but new products on the horizon could lift sales.
Apple‘s (NASDAQ:AAPL) latest earnings report was upbeat about the future, despite softness in demand for iPhones and wearables. Apple reached a new record for active users across its iDevices and continues to see new users for premium services, such as Apple TV+, Arcade, and News+.
The stock has returned market-crushing returns for investors over the last decade, but the near term will be challenging. Growth in its largest sales category, the iPhone, has been slowing. This trend will worsen in the near term, especially as consumer spending takes a hit with higher unemployment as a result of COVID-19.
I own shares of Apple and believe the business will continue to grow over time. But is this the right time to buy the stock? To answer this question, we’ll review a few reasons to wait, along with a few reasons to take the plunge.
Reasons not to buy
A weak outlook for iPhone sales is one reason to pass on Apple stock for now, especially since the stock has already rebounded off recent lows and sits at a high valuation relative to underlying growth.
During the last conference call, management didn’t offer guidance but did state that sales of iPhone and wearables (e.g. Apple Watch) will worsen through June. The iPhone comprised half of Apple’s total revenue in its most recent quarter.
Bullish investors point to the growth of the services business, but it currently makes up only 23% of Apple’s revenue, so it’s not enough to completely offset potential softness in iPhone sales.
Some investors may be looking ahead to the next upgrade cycle, when Apple is expected to announce the new 5G-enabled iPhone. But there is always the possibility that the new iPhone could be delayed due to the coronavirus pandemic, or that the upgrade cycle may not be as strong as expected.
However, Apple disclosed on its last earnings call that its supply chains were back up and running, so it seems the new iPhone is on schedule for launch in the fall.
The faster connection speeds of a 5G iPhone could cause a huge upgrade cycle over the next few years. But assuming the new iPhone does release as expected this fall, it’s unclear what the demand will look like, especially since more than 20 million Americans just lost their jobs in April, the largest decline ever recorded in a single month.
For what it’s worth, the consensus analyst estimate currently expects Apple to report 1% growth in revenue and low-single-digit growth in earnings in fiscal 2020 (which ends in September). That is very low growth for a stock that is trading at 25 times forward earnings estimates.
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Reasons to buy
Apple stock may have limited upside in the near term, given its slowing growth and high valuation. But investors who are looking to start a new position in one of the top brands in the world could do so for a few reasons.
Apple is a solid business, with a mountain of cash to invest in new products and services to drive growth over the long term. It is continuing to invest in new products and has pledged to invest $350 billion in the U.S. economy over the next five years. I’m certainly not selling my shares, even if Apple reports a decrease in revenue and earnings for the full fiscal year. I’m more interested in where Apple will be in 10 years.
No one knows exactly what the demand curve will be for a 5G iPhone, but over the next decade, 5G connection speeds will bring several benefits.
One area to watch is mobile gaming — the fastest-growing market in the video game industry. Faster connection speeds will make these apps run at much higher performance overall, especially when connecting multiple players in a competitive game at the same time. This will make iPhones and iPads much more formidable gaming platforms.
Apple is continuing to look for acquisitions to expand its capabilities. It just acquired NextVR, a provider of sports and other content for virtual reality products. The deal will only fuel recent rumors that Apple may release a new device with virtual reality or augmented reality technology, such as smart glasses, in the next few years.
Apple is a safe stock to buy, but it’s no bargain
Apple will remain a good investment for the long haul. Its installed base of active devices continues to grow, although slowly. In January, Apple reported an installed base of more than 1.5 billion active devices, up 100 million over the preceding 12 months. The growing installed base should lead to a more valuable business over time, which should translate to a rising stock price.
But investors thinking of buying this FAANG stock should keep in mind the near-term risk of weak demand for the iPhone, coupled with the stock’s relatively high forward P/E ratio of 25. That combination is not a recipe for a rising stock price from the current high.
New investors who love Apple and want skin in the game could start small and gradually add shares over time, which is a perfectly reasonable way to invest in businesses you like. This is the way I invest when I love a company, but not the stock’s valuation.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.