Is Apple Stock Just A Conservative Play Now?

  • Apple has lost favor with some analysts following its price cut on iPhones.
  • Apple stock has declined by nearly 8% in December 2015 alone.
  • Alex Xu thinks Apple shares are better suited for conservative investors for now.

Everybody who follows Apple stock knows that it has had a very rough time in the last month or so. In December alone, Apple stock has declined by close to 8%, owing to a recent downgrade among other things. Apple stock which did pretty well for bulk of the year, has seen a complete shift in sentiment, which is reflected in the fall from $133 a share at its peak in 2015, to its current perch at around $108 a share.

Apple stock started the year at around $110 a share, rallying nicely to over $130 a share and holding on to those gains till July this year. However, a correction in the broader markets dragged the stock lower, and it hasn't recovered since. A spate of developments have impacted Apple shares, starting with the company's move to slash iPhone prices. While some have seen Apple's move as a strategy to gain market share, especially in emerging markets, others have interpreted it as a sign of weakness, and sluggish sales. However, other reports suggest that Apple has a strong year ahead of it in 2016. $TSMC, the chip manufacturer which supplies chips for Apple's iPhone, has predicted strong revenue numbers in 2016. Additionally, Foxconn, the largest assembler of Apple's iPhone and iPad, reported strong revenues recently. Some analysts see this as a leading indicator for Apple sales in 2016. Some of these theories involve a fair amount of speculation. However, the fact that Apple's vendors are doing well, could indeed mean that things could look up for Apple in the coming year.

The bearish outlook on Apple stock going into 2016 seems to be a little overdone, given the valuations that it's now trading at. Apple shares are now trading at valuations that are very near 5 year lows. At its current PE ratio of less than 12, Apple stock is trading well below its 5 year average PE ratio of 15. Apple's price to cash flows ratio, a good estimate of Apple's valuations with reference to its operations and cash generation also re-inforce the same view. Apple's price to cash flow ratio of 9.5 indicates a significant discount compared to the S&P 500 price to cash flow ratio of 18.

Financially there's no arguing with a case like Apple's. An unbelievable growth rate of over 30% on a revenue base of over $50 every quarter, net margins of about 20% and hefty cash flows. To put things into perspective, Apple generated free cash flows of about $70 billion in the year ending September 2015. Talking of cash, Apple has over $200 billion in cash and just over $53 billion in debt. So that's a good balance sheet, a great income statement and last but not the least, great ability to generate cash, not just profits. Financially speaking, that's pretty much everything an  investor could ask for. Of course, there are dividends too, though the dividend yield on Apple stock is fairly low at this point.

The major risk that most analysts and observers alike point out, is Apple's dependence on its iPhone. The iWatch hasn't seen the kind of success that the iPhone has. Then again, the iPhone has probably set the bar too high anyway, but either way, Apple's iWatch is arguably not a run away success. With iPad sales declining, Apple stock gets more closely tied with iPhone sales. Innovation is arguably not as ground breaking or earth shattering as it used to be, which raises the debate about whether iPhone sales can continue to bear the burden of carrying the Apple stock price.

So should you invest in Apple right now? As always, there are always two or more views. Alex Xu is of the opinion that Apple stock at the moment is one for a specific set of investors. He thinks it's a good option for the slightly more conservative investors. However, he thinks there would have to be sufficient increase in innovation and unveiling of new growth drivers for the stock to bring back growth investors who tend to look less at broad financials, and more for momentum. For now, Alex thinks Apple will have to do more to drive Apple stock much higher from its current levels. Watch the video to know why.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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