Capital.com Research TeamApple (AAPL) is a brand most valued by its consumers as well as shareholders; in fact, it has been an investor favourite for a long time. Its iPhone success helped the business to reach the $1tr (£800bn, €920bn) valuation back in 2018. However, the company appeared to not be immune to the Covid-19 pandemic. While the short-term outlook is bleak for the iPhone maker, could the long-term opportunity from 5G outweigh the looming troubles?
Apple stock was trading near its all-time high of $327.85 in February before the deadly virus put the global economy into tailspin. The share price fell 32 per cent in the March sell-off as the uncertainty around the pandemic triggered panic selling. While the uncertainty prevails, the panic has subsided, and the stock recovered rising 34 per cent from its March low.
AAPL is now trading near $300, raising the question among investors of whether it is the right time to invest in Apple stock now. To answer it, in this article, we take a look at Apple's business in the Covid-19 environment, its ability to withstand these tough times and its future growth opportunities.
If history is any guide, is Apple stock a good buy?
Consumers like Apple because of its premium products, such as the iPhone, MacBook, iPad and Apple Watch. However, these products make the company a cyclical stock and also prone to an economic downturn.
In the 2008 financial crisis, Apple stock witnessed two major sell-offs. The first one pulled the stock down 40 per cent between January 1 and February 18; the second dragged the stock down 53 per cent between August 18 and January 12, 2009.
However, the share price grew 27 fold over the next 10 years as the economy recovered from the crisis, and its iPhone devices made it the world's third-largest smartphone vendor.
Apple was the first American company to reach the $1tr market valuation in August 2018. Warren Buffett called it the "best business in the world", with the firm topping Berkshire Hathaway's portfolio with an asset value of $75.4bn.
To protect itself from cyclicality, Apple started expanding its services segment that generates stable and recurring revenue. The company's transition to services is finally paying off.
Apple's business in the Covid-19 environment
Is Apple stock a good buy during the times of today’s turbulent market environment? Taking a look at its recently published financial quarterly report, the company’s revenue rose 0.5 per cent year-on-year (YoY) to $58.3bn as strength in the services segment more than offset weakness in the products segment. The company now earns 77 per cent of its revenue from products and 23 per cent from services.
Apple's iPhone suffered the biggest casualty, as both demand and supply were disrupted. The company assembles almost all its smartphones in China, the origin of the virus. Moreover, Apple had to close its retail stores amid the global lockdown, which negatively impacted its product sales. In the recent quarter, iPhone, Mac and iPad revenues fell 7 per cent, 3 per cent, and 10 per cent respectively, on a YoY basis. Apple CFO Luca Maestri expects iPhone demand to fall lower in the next quarter.
The coronavirus pandemic has changed the way people are using Apple products. Even though the firm’s device sales fell, the company is seeing a record uptick in its services, which include App Store, Apple News, Apple TV, Apple Music, Video, cloud services, and App Store search ad business. In the recent quarter, the services sector revenue rose 16 per cent YoY to an all-time high of $13.35bn.
As noted by Morgan Stanley analyst Katy Huberty, April was the strongest month for Apple's App Store. Citing preliminary data from Sensor Tower, she estimates that App Store downloads rose 40 per cent YoY, boosting its net revenue 31 per cent YoY in April.
Challenges and opportunities for Apple in 2020
The year 2020 brings both challenges and opportunities for the business. If we look at the absolute revenue figures, Apple's Services revenue rose $1.9bn, while its product revenue fell $1.6bn in fiscal Q2. The prolonged Covid-19 scenario will only boost its services segment, which earns a gross margin of 65.4 per cent, more than double the product segment gross margin of 30.3 per cent.
The global lockdown is driving demand for iPad and Mac as people shift to online education and work-from-home regimes. Apple has leveraged this opportunity by launching its new iPad Pro, Magic Keyboard, MacBook Air, and the new iPhone SE.
Raymond James analyst Chris Caso and Daiwa analyst Louis Miscioscia are optimistic about Mac and iPad sales in the June quarter. They raised their price target on Apple to $305 and $320, respectively.
Coronavirus affects markets
The smartphone market is saturating, but the next-generation 5G technology could revive demand in the coming years. Apple is scheduled to launch its first 5G iPhones later this year. The new iPhones could drive sales in the December quarter.
It is largely expected that once life returns to normal and the economy recovers, Apple's product business will revive. The pandemic will make people more health conscious and drive demand for the Apple Watch that helps monitor a patient's heart rate, while keeping the data secure.
However, even if Apple's business adjusts to the Covid-19 crisis, the growing tensions between the US and China still present a major challenge. China is Apple's production hub, and the US is its biggest market. When the US-China trade war ignited in the fourth quarter of 2018, Apple stock shed 33 per cent. Renewed trade tensions could deal another blow to the share price.
So, is Apple a good investment in 2020?
Now, this brings us to the question of why you should buy Apple stock.
History shows that Apple has successfully recovered from economic downturns and generated positive returns to those who bought its shares at the dip. In the past 12 years, Apple's stock has fallen five times only to grow more.
The company managed to overcome every crisis because of its strong balance sheet and cash flows. In fiscal Q2 2020, Apple generated $13.3bn in cash and had $192.8bn in cash reserves. The firm even increased dividends by 6 per cent and announced a $50bn share repurchase programme, indicating that the business has enough cash to withstand a downturn and still give returns to shareholders.
The verdict: Apple stock – buy, sell or hold?
Apple stock gives returns through capital appreciation and dividend. If you had invested $1,000 in the stock in March, you would have earned $241 in capital appreciation and $3.38 in the total dividend.
As the company’s share price has already recovered from the March sell-off, the most common question is: is now a good time to buy Apple stock?
At $300, Apple is now trading at a PE (price-to-earnings) ratio of 22.6x, which is close to its 52-week high of 26.93x. In terms of valuation, the stock looks expensive in the current market scenario plagued with a looming economic and political crises. There is uncertainty around the duration and magnitude of the pandemic, its financial and economic impact, the US elections, and growing tensions between the US and China. Even Apple's management cannot provide guidance amid these unstable times.
Should I buy Apple shares? It is advisable not to buy a cyclical stock like Apple at its current valuation. If there is another sell-off and Apple stock falls, that is a good buy point.
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So, what are your bets on the company's future? What are Apple shares: buy or sell?
