While some shareholders may be edging towards a panic as Apple Inc. ‘s growth prospects once again come into question, history may provide a bit of perspective in the matter. Looking back a few years, this is not the first time that shares have taken a bath since the iPad and iPhone began their disruptive global domineering ways.
After posting lackluster quarterly results, Apple Inc. ‘s price decline is starting to push the 20% level from earlier year highs, and has eclipsed a 30% sell off from all-time highs. As of May 2, shares have traded down in 7 straight sessions.
A little over four years ago, Apple shares traded over $100 (split adjusted), marginally higher than today’s market valuation. About nine months later the price had crumbled almost 50% to $55. From those 2013 lows, Apple’s stock has still climbed 70%, despite the recent pummeling.
Apple stock price since 2010
As has been the case for many years now, Apple’s valuation on a pure EPS basis is anything but frothy. Even with almost a 10% ratchet downward in consensus analyst estimates after the recent crummy quarter, the stock trades at about an 11 multiple on expected 2016 fiscal numbers.
Of course the question investors should be asking themselves is if Apple is really a value here, or whether it has fallen into the value trap category. Clearly the market sensed something was really wrong by the middle of 2012, and was asking the same question, but ultimately results started to ramp again.
As a current long-term holder of Apple’s stock, I haven’t done a knee-jerk here, and admit I feel somewhat the way I did 4 years ago when the stock starting cascading lower. While I did not cherry pick the bottom, I did add to my position during that period. Today, I’m holding, but haven’t added, as I’m doing some watchful waiting.
The Growth Variables
Deciphering between a value and a value trap is probably one of the most difficult analytical exercises an investor can embark upon. Clearly those selling the 2012-13 drought sensed a more permanent, secular problem on the company’s doorstep. Clearly they were wrong, or perhaps just a bit early.
Some of the variables you need to be thinking about today include:
- How much further international penetration can the company make?
- Is there another product that will have the disruptive potential of iPad and iPhone — Apple Watch, while adding incrementally to the revenue base, will clearly not build that kind of scale.
- Will wireless service provider competition/price wars end up hurting Apple?
- Will the Android/Samsung platform continue to make gains longer-term?
Apple Inc. bulls seem to wear rose color glasses a lot of the time, which probably makes answering any of these questions in an objective fashion somewhat difficult. Still, if you are a serious investor, you need to take the time to decide for yourself whether this is simply another lull in the growth of the Apple ecosystem or representative of the start of a secular slowdown.
How To Handle Apple Stock
I would be lying if I said I knew how long the stock will be in the tank, but taking all the variables into account, I personally anticipate another growth spurt from the company at some point. The problem, if history is any indicator, is that you might have to bear significantly more price decay to see it. I’m content with that, potentially adding at lower levels, and reaping substantial dividend growth going forward.
However, more price-sensitive types may want to hedge with protective puts or stop-loss orders, or utilize more complex options strategies to hedge downside but also participate in future upside.
To an extent, the company’s sheer size at this point must be considered. Though economies of scale are generally considered beneficial in terms of margins and purchase power, financial history is littered with powerful, large companies that ended up on skid row or out of business. Kodak and Bethlehem Steel, once the bluest of blue chips, as well as more contemporary names like Enron, America Online, Dell Computer, and Nokia have veritable riches to rags stories behind them.
Given the penetration of the smartphone and other of Apple’s products into enterprise and retail consumer mainstreams, I personally don’t see the same thing happening here. By the same token, it’s never wise to assume you know more than the rest of the market or can necessarily predict that which comes around the corner.
A value trap is only seen in hindsight.