Apple stock has had a rough patch lately, dropping nearly 13% this month alone, which is significant for the company. It's also down around 9% year-to-date. Analysts have been downgrading the stock, and there's a lot of negativity surrounding the company. My thoughts on whether Apple now represents a great buying opportunity for such a high-quality company, or if it’s still overvalued, and we should wait for a better price. That’s what I’m going to dive into in this article, and I hope you find it helpful.
Global Declining iPhone
One reason I think Apple has been struggling recently is due to the global decline in smartphone shipments, as seen in their latest report. While this may not be 100% official, it’s largely driven by worldwide shipment trends. Apple leads with a 23.2% global market share, but their year-over-year growth in shipments dropped by 4.1%. Samsung also saw a decline of 2.7%. Meanwhile, Chinese manufacturers have been significantly expanding their market share, with shipment growth of over 12% and 8.6%, especially in Asia and other regions outside the U.S. This competition has taken market share away from both Apple and Samsung, contributing to the drop in shipments for both companies.
However, this isn’t a new issue for Apple, and while product sales have been declining over the past 12 months, Apple’s Services segment saw a nearly $11 billion increase. What's impressive is that they grew Services revenue by $1 billion while only increasing costs by $300 million. This is remarkable because most companies that see that level of revenue growth typically have to increase their operating expenses much more, but Apple has managed this expansion very efficiently. It’s a testament to the strength of their business model.
Fundamental Analysis
On the valuation side, Apple’s price-to-earnings (P/E) ratio is around 31 times earnings, which is much higher than the 13 times earnings it traded at in 2017-2018. I personally bought Apple at those lower valuations during the 2018 sell-off, but made the mistake of selling in late 2019 when it had already risen. Back then, the company was much different, though. Now, the Services side of the business has much higher margins and the company’s financials have significantly improved. Their return on capital has soared from around 21-31% in 2018 to nearly 70% now, and their net income margin has risen from 21-22% to nearly 26.5%.
Share Buyback
Apple has also been aggressive with share buybacks, reducing their outstanding shares from 26.5 million to 15 million. Warren Buffett has long been a fan of Apple’s share repurchases. However, recently, I feel that their buybacks might not be as well-timed, as they've been purchasing shares near high valuations. In general, buybacks need to be done opportunistically, at the right time, and when the stock is priced attractively.
So, while Apple is a great company with a solid business model, the current valuation and timing might not make it the best buy at this moment.
Free Cash Flow
Companies like Pepsi and McDonald's have been known to repurchase stock at almost any price, and they’ve managed to succeed over time. Apple has also followed a similar approach. While it’s worked for them, I personally prefer when companies buy back shares at the right valuation, rather than doing it just to boost earnings per share. Apple has spent a large portion of its free cash flow on share repurchases and about $15 billion in dividends. As you can see, the majority of their cash flow has gone toward share buybacks (represented by the orange), which has created value for shareholders and worked well for the company.
Earning Forecast
When it comes to valuing Apple, it's a bit tricky, but I’ll give it a shot. I’m using the analysts’ estimates for earnings per share (EPS) growth over the next few years: 10%, 9%, 12%, and 10.5%. I think this is reasonable since it accounts for buybacks and expanding net income margins. Apple’s revenue growth has been somewhat stagnant lately, with some declines and modest gains. However, their ability to grow net income margins and buy back stock has kept earnings per share growing at around 9-11% annually. For my estimate, I’m using an average EPS growth of 11%.
iPhone 17 Can't save Apple!
In recent years, the iPhone has lost much of the innovative spirit that made it a game-changer. With the iPhone 16, it's clear that Apple has fallen behind its competitors in terms of meaningful upgrades. What was once an exciting and revolutionary product now feels like a cash grab, riding on the legacy it built years ago.
It’s not just complacency—Apple’s business practices have become increasingly questionable. The company has faced lawsuits for deliberately slowing down older devices to push people toward new models. Updates to iOS often make older phones slower and more prone to malfunction. Apple's repair policies are also problematic—its devices are notoriously difficult to fix without going through Apple’s official channels, making repairs both costly and inconvenient.
Which brings us back to the iPhone 16—there’s nothing new or exciting about it, but it still carries a hefty price tag. Apple's shift from innovation to repetition, combined with questionable business practices, shows that the company is no longer pushing the limits of technology as it once did. The iPhone 16 may not offer much in terms of advancement, but that’s unlikely to stop it from achieving massive sales. As long as Apple continues to profit from its brand loyalty, it's safe to assume that we won’t see any groundbreaking changes for a long time.
Apple’s future might depend just as much on its overall strategy—like expanding services or integrating AI and other cutting-edge tech into its ecosystem. If they can push new features or a more compelling user experience, it could shift the game.
Valuation
Based on this, I started with the 2024 estimated EPS of $6.75 and projected it forward 5 years at an 11% growth rate. This gives me an estimated EPS of $11.37 by 2029. Now, I’ll use three different P/E multiples for my valuation: the worst-case, base-case, and best-case scenarios.
-
In the worst-case scenario, I’m using a P/E of 27, which reflects the average over the last 5 years. With an EPS of $11.37, this puts the stock at $306 per share, which implies about a 37% upside over the next 5 years.
-
In the base-case scenario, if Apple maintains its current P/E of around 31, the stock could reach $352 per share, giving about 58% upside in 5 years.
-
In the best-case scenario, if Apple continues to expand margins and the P/E rises to 35, the stock could hit $398 per share, offering a 79% upside.
When I evaluate investments, I compare them to the S&P 500’s historical average return of around 7-8% per year. I typically aim for at least double that—15% per year or 100% total return over 5 years. So, in order to get a double on my investment in Apple, I would want to buy the stock at around $153 in the worst-case scenario, or $176-$180 in the base-case scenario.
Conclusion
For me, Apple at $222 per share isn’t a buy. If I were to consider an investment, I wouldn’t pay more than $176 or so, and that would be in the base-case scenario. This isn’t about timing the market, but about ensuring I’m paying a fair price for the company. So, for my strategy, my fair value for Apple is around $175-$180 in the base case, and $153 in the worst case.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub
Comments