After last year’s slump, Apple (NASDAQ:AAPL) appears ready to move on from the iPhone. The product launched the lucrative smartphone market and took the market cap of AAPL stock briefly above $1 trillion. Now, falling prices have forced the company to grow without the help of its long-time core iPhone product.
Fortunately, the company’s massive cash assets and reasonable valuation leave it well-positioned for such a comeback. Given the prospect of returning growth in the coming years, it’s likely the time is now to begin building long-term positions in Apple stock.
AAPL Stock Still Driven by Uncertainty
Apple stock lost 37.6% of its value between the beginning of October and early December; the Nasdaq Composite index by comparison pared 14.5% in the same time. Disappointing iPhone sales led investors to dump the shares. Even Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) reduced its large AAPL stock horder during the fourth quarter.
Apple continues to innovate with the iPhone. In response to Samsung (OTCMKTS:SSNLF) developing a foldable Galaxy, Apple filed a patent to offer a comparable foldable iPhone. It has also partnered with Goldman Sachs (NYSE:GS) on a credit card compatible with Apple’s Wallet app. However, such additions will probably not prevent the revenue slide.
Moreover, Apple’s smart speaker isn’t keeping pace with rivals. While HomePod sales grew by 45%, the Amazon (NASDAQ:AMZN) Echo saw a 91% sales increase and sales of Alphabet’s(NASDAQ:GOOGL) Google Home were up 123%. Even with the HomePod’s massive sales increase, it still only owns 4.1% of the market.
Apple’s Compelling Long-term Outlook
This month, AAPL stock has plateaued in the neighborhood of $170 a share. In the short term, I have low my expectations for Apple stock. I noted in mid January that the iPhone maker needed to “declare independence from iPhone dependence.” The company is doing just that, but it will take time.
However, despite miscues, I see too many reasons not to count Apple stock out longer term. Chief among them is its stash of cash. As of the recent quarterly report, Apple now holds $245 billion in cash, more that some of the world’s biggest central banks. Although most of the horde is kept overseas, Apple will reportedly bring much of that cash back home over the next few years. Either way, as we learned from Microsoft‘s(NASDAQ:MSFT) experience a few years ago, Apple holds enough cash to buy the innovation they cannot invent themselves.
This money gives AAPL a multitude of options. They could become a more dividend-oriented company and hike the payout. I see that as the quickest path to boosting the Apple stock price. The company could go into entertainment, perhaps buying Disney (NYSE:DIS) as my InvestorPlace colleague James Brumley suggests. Also, it appears they have invested some cash in achieving leadership in healthcare. As I mentioned in a recent article, last month former Apple CEO John Sculley predicted that the healthcare-related features on the Apple Watch will become the company’s biggest game changer since it introduced the iPhone in 2007.
Whatever new products emerge, investors can buy that innovation at a low price. The price-to-earnings (PE) ratio stands at 14.1. Historically, Apple stock has not commanded high multiples, and declining profits will hurt them in 2019. However, analysts predict 11.8% earnings growth for 2020. They also project average profit increases of 13% per year over the next five years. Despite lingering uncertainty, this growth should drive Apple stock higher in the coming years.
Concluding Thoughts on Apple Stock
Despite recent disappointments with iPhone and HomePod sales, I see now as the time to start building long-term positions in AAPL stock. Recovery will take time. The iPhone has long provided the majority of Apple’s revenue, and replacing that lost income will take time.
However, while revenues stagnate, the company has made inroads in the healthcare field that could lead to the company’s biggest gamechanger since it introduced the iPhone. Moreover, we do not yet know how Apple will deploy its $245 billion in cash reserves. However, companies this well-resourced can buy the innovation that they cannot create. In short, I think Apple can easily resume double-digit profit increases as new products reach the marketplace.
Investors should also remember that despite the smaller stake, AAPL stock remains Berkshire’s largest holding. Moreover, the reduced stake applies to the fourth quarter only. It would not surprise me if we later find out that Mr. Buffett bought more AAPL near the $142 per share the stock saw on Jan. 3.
Either way, cash reserves, PE ratios, growth forecasts, and product releases all point to a bright future for Apple. Barring a major economic disruption, this could make 2019 a great year to buy more Apple stock.
As of this writing, Will Healy is long BRK.B stock. You can follow Will on Twitter at @HealyWriting.
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