Apple Inc. (AAPL, Financial) has been in the news a lot lately, with market-moving factors ranging from new product launches to tariff concerns keeping the stock in the spotlight. It is imperative for investors of this $1 trillion market cap company to evaluate the recent string of events and judge the value the investment offers.
Annual new product launch
It's that time of year again. On Sept. 12, Apple will unveil its latest iPhone model and other new products. Rumor has it the company is planning to introduce three new versions of the iPhone, two with OLED screens and a lower-cost phone with an LCD display.
As this is mere speculation, nothing is certian until 1 p.m. Eastern on Wednesday.Ă‚
While Apple generates around 56% of its revenue from iPhone sales, multiple other launches, ranging from updated watches to iPads, are expected to drive investor sentiment at this year’s event.
Since the tech giant launches new products every September, the Street is known to set high expectations prior to the event and then speculate on how it might miss those preconceived standards. Therefore, while many analysts forecast a stock price drop immediately following the event, Apple is still seen as a long-term value play. As a result, what matters to investors is the end result and not the short-term reaction.
Apple is one of the very few plays that has grown as a result of the company’s actual performance rather than optimistic growth forecasts. Moreover, it has a track record of profitability and its immense customer loyalty has contributed to the optimism surrouncding the stock price. Given the company’s strong pricing power coupled with customer loyalty, analysts don’t expect increasing average selling prices to negatively impact sales.
Trade war: A negative?
From a political standpoint, Apple's future may still be in hot water as U.S. trade talks continue.
“Apple prices may increase because of the massive Tariffs we may be imposing on China – but there is an easy solution where there would be ZERO tax, and indeed a tax incentive,” President Trump tweeted. “Make your products in the United States instead of China. Start building new plants now. Exciting!”
While Trump’s tweet about tariffs on Chinese goods did unnerve investors at first, the impact to the company’s top line isn’t expected to be significant. Although Apple acknowledged the possible negative impact from Trump’s tariff plans in a letter to U.S. Trade Representative Robert Lighthizer, iPhones are not included in that list.
In addition, the impact to other products in its portfolio will be somewhat offset by the production cost savings due to the greenback’s recent rally against the renminbi. Moreover, the trade war does not seem to be a major talking point for investors as the Street expects negotiations to take place and, ultimately, reach a resolution.Â
To conclude
Touted to be one of the biggest launches in Apple’s history, investors are glued to their screens waiting to see how markets react to the event. Brand loyalty is evident in Apple’s case as the price tag associated with the $1,000 iPhone X wasn’t enough to make consumers shift to other devices following the last launch event. The company is surely hoping for a repeat of last year’s positivity.
From a valuation perspective, Apple still seems to be trading at a relatively cheap price. Its currently trading at a price-earnings ratio of 20.07, compared with the S&P 500’s price-earnings ratio of 24, despite the nearly 37% rally in the stock so far this year. Moreover, the company’s operating margin of 26.6%, which is above the industry median of 4.79%, is definitely worth a second look.
All told, investors should not consider short-term reactions as an indication for long-term potential, especially when it comes to a company like Apple. Out of the 19 launch events so far, the company has recorded a three-day net decline following the event 11 times. Therefore, erratic expectations should not be the driving force of investment decisions. Per GuruFocus, Apple scores an 8 out of 10 when it comes to profitability and growth.
Disclosure: I do not own any of the stocks mentioned above.