Shares of Apple (AAPL, Financial) are down 30% since hitting $134 per share this past May. A majority of that decline came during the last three months as the stock market hit a whirlwind downtrend amid concerns over global economic growth.
Energy prices have not helped either, and even though the price of oil has recouped some of the losses in the last few days, the stock market is far from recovery. Even as a strong stock, Apple has not been immune to this sentiment and faces further decline if investors cannot choose to see beyond conventional market behavior.
Besides a tumultuous stock market environment, Apple has also been facing certain problems of its own, chief among which has been the slowing growth in iPhone sales. This has subsequently led to the decline in revenue growth rate and investors appear to have taken this as a sign of weakness for the tech giant.
Apple is one of the best companies, however, when it comes to innovation and market disruption. Over the last few years, Apple has increased its investment in R&D, which suggests that the company is in a reinvestment phase.
Apple has increased its quarterly R&D spending from about $600 million in the second quarter 2011 to about $2.4 billion in the fourth quarter 2015. Going by last quarter’s run-rate, this indicates that Apple will spend more than $10 billion this year on R&D. Apple is currently pursuing investments in virtual and augmented reality, as well as electronic cars.
In addition to this, Apple’s recently launched products Apple TV, Apple Pay, Apple Music and Apple Watch are only beginning to gain traction in the market based on recent quarter results. In the most recent conference call, CEO Tim Cook told investors that Apple Music's paid subscribers had surpassed 10 million, while Apple Pay users grew 10-fold within the last six months.
Let’s not forget that Apple has also expanded its iPhone product lineup by launching bigger screen iPhones, the iPhone 6 and iPhone 6 Plus, which were updated this past September to iPhone 6S and iPhone 6S Plus. This year, Apple will be launching another four-inch iPhone, which analysts believe is targeted at the Indian market.
Apple has established partnerships in India that will see it gain access to more than 140 million in potential new smartphone users. Given the economic status of the nation alongside the growth potential, this product appears right for the market. Apple is gaining access to a market that could see it boost CAGR for its iPhone product line-up significantly within the next few quarters.
The company will also be updating its current iPhone line-up to iPhone 7 and iPhone 7 Plus as it seeks to maintain leadership in product enhancements to boost customer experience.
While Apple’s revenues have shown some weakness in growth rates recently, the company still maintains leadership in key fundamental areas, which suggest that its valuation is far from optimal. Apple’s margins are the best in the industry and this helps it to keep on generating high operating cash flows despite a tightening top line.
Conclusion
Apple is a cash king and currently has a dividend yield of about 2.1% with a payout of 21%. This suggests that given its ability to generate cash flows and the low payout level, the company could still increase the dividend. This could come in handy especially due to the current stock market plunge.
In addition, Apple shares appear significantly cheaper when compared to industry rivals. Apple currently trades at a P/E ratio of 10x compared to the industry average of 16.42x, while its price/earnings to growth PEG ratio stands at 0.87x compared to the industry average of 0.98x. Its P/S ratio, however, is high at 2.21x compared to the industry average of 1.19x, which clearly illustrates top line weakness.
The bottom line is that Apple is currently in a reinvestment stage. Its shares are cheaply valued and the company possesses significant growth potential, which is one of the facts that many analysts and investors seem to dismiss.
As such, investors who are interpreting Apple’s reinvestment phase for weakness should do so at their own peril, because this tech giant is still the best mega cap stock to invest in based on multiple valuation metrics.
Disclosure: I have no position in any stock mentioned.
