With a trailing P/E ratio 10.40, Apple (AAPL, Financial) may be one of the most undervalued stocks in the market. If you also take into account Apple’s cash reserve of $216 billion, its P/E ratio stands at just around 7. While Apple’s stock appears dirt cheap, its upside may be limited. Due to the stalling growth of iPhone sales, Apple’s shares may remain depressed at least until the launch of the next installment of the iPhone.
Owing to the falling iPhone sales, Apple’s shares are down over 8% year to date and may fall further in the coming months. For this reason, I think investors should hold back on buying Apple’s shares and wait for a better entry point in the future.
Sales slowdown
The iPhone accounts for over 60% of Apple’s revenue, and the potential slowdown in sales has spooked investors away from the stock. Although Apple beat the earnings estimate in the latest reported quarter, it missed on the revenue targets due to the slowdown in iPhone sales.
To make matters worse, Apple estimated the next quarter revenue of just above $50 billion. To put into perspective, if Apple manages to meet the midpoint of its revenue guidance, its sales would still drop by 10% year over year.
The market is obsessed with year over year growth, which is why companies like Netflix (NFLX, Financial) and Amazon (AMZN, Financial) are trading at rich valuations, whereas saturated value stocks like Apple are dirt cheap. While I still like Apple, I think the stock will continue moving lower due to the slowdown in iPhone sales.
It would probably be difficult for Apple to beat the bar set by the iPhone 6. Hence, I think investors should not buy Apple’s stock just yet, and wait for the company to unveil the next-generation of the iPhone before deciding to invest in the stock.
Conclusion
With Mac and iPad sales falling significantly, Apple needs to deliver a blockbuster product to make up for the lost sales. Although it will be difficult for the upcoming iPhone to beat the records set by the iPhone 6, I think Apple can continue growing by diversifying into other markets. The Cupertino giant desperately needs to reduce its reliance on the iPhone.
Given the slowing demand and the weak guidance, sales of the iPhone 6S may continue to disappoint and this may push Apple’s stock lower in the short-term. Hence, investors shouldn’t buy the stock just yet.
