If you own Apple (AAPL -2.98%) stock, you're not alone. According to a 2014 survey, shares of the iPhone-maker were by far the most popular among individual investors, ranking as the most widely held stock in 45 of 50 states.
Recently, that investment hasn't been so hot. The stock is off its all-time high last year by nearly 30%. Now, after reporting its first sales decline in 13 years and receiving a surprising investment from Warren Buffett's Berkshire Hathaway, the stock may be at a turning point. More than ever before, Apple looks like a value play in search of its next big hit.
As the company moves into its next life phase, here are three key factors for investors to keep in mind.
1. It's all about China
In Apple's Q2 2015, iPhone sales in China topped the U.S. for the first time, just a year after Apple signed its landmark deal with China Mobile. The world's most populous country is now the world's biggest smartphone market, but the smartphone penetration rate in China was under 40% last year, according to eMarketer. With the U.S. and Europe having matured and India still in its infancy, China is Apple's key growth market for the foreseeable future.
Despite China's slowing economic growth, it's still growing at a much faster pace than the U.S. or any other major economy, and its middle class continues to rapidly expand. Companies like Starbucks and McDonald's are also increasing their focus on this opportunity, with the coffee giant planning to open 500 stores in China in each of the next five years.
The moderately priced iPhone SE seems designed to take advantage of the Chinese market and other developing economies. In fact, in less than a week after its release, Apple had taken 3.4 million pre-orders for the SE in China, a bullish sign considering total iPhone sales globally last quarter were 51.2 million.
Continued success in China is not guaranteed, and the macroeconomic environment will go a long way to determining it, but more than any other country, China will be key to Apple's future.
2. There will probably never be another hit like the iPhone
Investors waiting for the product launch that will match the iPhone can keep holding their breath. It's hard to overstate the success of Apple's trademark smartphone. Driven largely by the iPhone, Apple's holiday quarter profit of $18.4 billion was bigger than last year's profit at all but three companies in the S&P 500: Berkshire Hathaway, Wells Fargo, and JPMorgan Chase.
The iPhone contributes more than 65% of the company's revenue, and likely a greater percentage of profit, meaning if the device was its own company, it would be the most profitable in the world.
There are a number of reasons the success of the iPhone will be so hard to repeat, but two in particular come to mind. Apple's visionary founder Steve Jobs, regarded as the singular creative genius of his time, is no longer with us, and opportunities to disrupt industries as vast as mobile computing and telecommunications just don't come around very often.
If there's any comparable horizon on the way, it would seem to be automobiles. Apple and a number of other tech giants and traditional carmakers are busy working on the car of the future, but that level of competition may make it difficult for Apple to dominate the future car market the way it has with phones.
There are a number of key differences between car and smartphone markets as well. The "upgrade cycle" for cars is much longer. The average length of ownership of a new car is now about 6.5 years, and the average age of cars on the road is now 11.5 years.That compares to iPhone users who tend to upgrade their phones every two years. The longer upgrade cycle means it would take Apple much longer to penetrate the auto market as consumers are unlikely to dump their current vehicle that they've spent thousands of dollars on to prematurely upgrade to an Apple Car. Additionally, such a product would not be subsidized by partners in the way the iPhone was subsidized by telecoms.
The biggest concern, however, may be that if a self-driving car becomes mainstream, it's likely to reduce car ownership. Certainly, that is Uber's hope as the leading ride-hailing service would like to reduce the cost of transportation enough to make car ownership unnecessary -- at least for city-dwellers, who would then rely on its own service. Such an outcome would undercut the most likely potential market for an Apple car: high-earning urbanites.
3. Apple is being valued like a no-growth stock
With a P/E of just 11, Apple is one of the cheapest stocks in the S&P 500. Its valuation is less than half of the broad market index's at 24, and backing out its cash hoard gives it a P/E of just around 8. Fellow tech giant IBM (IBM -0.66%) may offer the best comparison. Big Blue is valued at a P/E of 11, but it's posted 16 straight quarters of declining revenue. While no two companies are perfectly comparable, Apple would seem to be in a better position than IBM, which has struggled in its transition to the cloud-computing era.
Benjamin Graham, the father of value investing and author of The Intelligent Investor, theorized that a no-growth company should be valued at a P/E of 8.5. Practically, there is no such thing as a no-growth company since growth rates are constantly changing, but Graham's theories have had perhaps more influence on valuation than any other. Considering the S&P's inflated valuation, it's even more surprising to see Apple fit Graham's definition of no-growth.
Is Apple truly a no-growth company? Despite the setback in its recent quarter, it's hard to see it that way. The iPhone 7 is set to debut in a few months, and Apple's R&D department is hard at work on other big ideas, including the car, which could be significantly accretive to earnings, if not as big as the iPhone. Its Services segment showed strong growth last quarter, increasing 20%, and segments like the App Store, Apple Music, and Apple Pay should continue to grow over the coming years. Sales of new products like the Apple Watch should also improve as new editions come out.
With more than $53 billion in net income last year, Apple is fantastically profitable. The iPhone-maker may finally be succumbing to the law of large numbers, but it's a mistake to assume it's done growing. At the very least, the billions of dollars of stock it's buying back should steadily push up its earnings per share, boosting the stock higher.