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Down 30% From Record Highs, Apple Is the Ultimate Contrarian Buy

By Aditya Raghunath - Mar 24, 2020 at 8:45AM

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Its stock has declined in line with the broader markets -- it's time to bet on the tech giant once again.

The coronavirus pandemic has sent the market spiraling downward. The S&P 500 is already down over 30% year to date, and this sell-off has driven many technology stocks lower in the last month as well. Industry heavyweight Apple (AAPL 1.30%) is also down 30% from the highs it recorded in February, and it now looks like a solid bet for contrarian investors.

Apple expects a weak March quarter

COVID-19 will take a serious toll on Apple's business as the company generates more than 60% of its revenue from international markets. The Greater China region accounted for 16.5% of sales in the trailing 12-month period. As China was the epicenter of the outbreak, the country has seen a massive decline in consumer spending.

For the first two months of 2020, retail sales have plunged more than 20% year over year. Now, COVID-19 is severely affecting European countries such as Italy, Spain, and France. Investors should expect a similar decline in demand in this region, where Apple generated 23.6% of sales in the past year.

A woman analyzing a stock chart on a computer screen.


On Feb. 17, Apple announced that it would miss revenue guidance for the fiscal second quarter due to supply chain constraints in China and lower demand for products in that region too. That reduced demand is likely to play itself out in every region where the outbreak spreads.

While the coronavirus has spooked investors, remember that the pandemic will most likely be a near-term headwind. The fundamentals of this tech behemoth remain strong.

A smartphone leader

In fiscal 2019, Apple generated 55% of revenue from its iPhone business, which remains the company's flagship product. It launched three new smartphones in Sept. 2019 that fueled sales in the fiscal 2020 first quarter.

During that period, Apple reported year-over-year sales growth of 9% to $91.8 billion thanks to strong demand for its iPhone 11 lineup. The company will also launch a cheaper device in the near future to target price-conscious consumers in emerging markets such as India and Southeast Asia, not to mention the three 5G-enabled smartphones that should come later this year, boosting demand beyond 2020.

Strong services growth

Another reason to be bullish about Apple's long-term prospects is the company's strong services growth. In fiscal 2019, this business segment experienced revenue growth of 16.5% year over year. 

It is now Apple's second-largest business and accounted for 17.8% of total sales in fiscal 2019, up from 15% in fiscal 2018. The services segment, which comprises several subscription products, including Apple TV+, Apple Arcade, iCloud, and Apple Music, generates a stable stream of revenue. As a result, it can offset the cyclical nature of smartphone demand and help the company during a downturn. 

This business is also Apple's most profitable and accounted for 30% of the company's gross profits last year. In the most recent quarter, services revenue was up 17%, driven by double-digit growth in all major regions and stellar performance from cloud services, the App Store, Apple Pay, Apple Music, and Apple Care.

Underlying this solid performance in services was an increase in Apple's installed base of more than 1.5 billion active devices, up 100 million year over year.

Wearables is a multibillion-dollar segment

Apple continues to launch top-notch products such as the AirPods and Apple Watch, and it has established itself as the leader in the global wearables market with a 36.5% market share, according research firm IDC's fourth-quarter data.

IDC estimates Apple shipped 106.5 million wearable devices in 2019. Using even a conservative average selling price of $200 per unit, the category would have generated at least $21 billion of annual sales.

While the growth in iPhone shipments has plateaued, wearables are now the company's fastest-growing business. During the first-quarter earnings call, CEO Tim Cook stated that wearables revenue grew 44% year over year. Evercore analyst Amit Daryanani estimates the wearables business might clear $60 billion and add $2 to earnings per share by 2023.

The verdict

Apple stock might move lower in the near term as the pandemic further creates a sense of panic among investors and global economies struggle under various preventative measures.

However, investors need to view every dip in Apple stock as a buying opportunity, given the company's robust growth estimates across its business segments. As the world gradually returns to normalcy, shares of Apple should make a strong comeback in the second half of 2020.

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