Is Apple Stock a Buy?

Apple's (AAPL 0.59%) stock price recently dipped after the tech giant posted a mixed fourth-quarter report on Oct. 28. Its revenue rose 29% year over year to $83.4 billion, which missed analysts' estimates by $1.6 billion. Its earnings rose 70% to $1.24 per share and matched analysts' expectations.

Apple attributed its slower-than-expected growth to supply chain constraints, which reduced its fourth-quarter sales by $6 billion. It expects those constraints to have an even bigger impact on its first-quarter sales.

Those challenges largely overshadowed CFO Luca Maestri's claim that Apple was still experiencing "better-than-expected demand" for its products during the company's conference call. Should investors avoid Apple after that messy quarter, or consider its latest pullback a buying opportunity?

Image source: Apple.

Apple's core businesses are still growing

Apple's iPhone, Mac, and iPad businesses all faced supply chain bottlenecks during the quarter, but all three segments still grew year over year:

Source: Apple. YOY = Year over year.

The wearables, home, and accessories business grew as it sold more Apple Watches and AirPods. Its closely watched services business also expanded as its cloud, video, and music businesses gained more subscribers; its App Store generated "record" revenue (despite facing ongoing pressure to lower its fees); and Apple Pay and Apple Care gained more users.

Apple ended the year with 745 million paid subscribers across all of its services, up nearly five times from five years earlier, while its annual services revenue nearly tripled over the past six years. That ongoing expansion should widen Apple's moat, increase the stickiness of its digital ecosystem, and reinforce the brand loyalty that supports its pricing power in the hardware market.

That's why Apple's gross and operating margins expanded significantly in both the fourth quarter and the full year, even as the broader smartphone, tablet, and PC markets were commoditized by cheaper devices:

Source: Apple.

Apple's expanding operating margins indicate it still has plenty of bargaining power with its suppliers. It also doesn't need to rely too heavily on pricey marketing campaigns to generate stable sales growth.

Apple also continued to generate double-digit revenue growth across all five of its main geographic regions during the fourth quarter:

Source: Apple. YOY = Year over year.

Apple's massive growth in the Greater China region, which marked an acceleration from its 58% growth in the third quarter, should silence the bearish claims that it will lose the market to Chinese competitors like Xiaomi, Oppo, Vivo, and Huawei.

In fact, Apple's share of the Chinese smartphone market actually expanded from 8% to 13% between the third quarters of 2020 and 2021, according to Counterpoint Research, even as the critics fretted over potential boycotts related to the trade war, the tech war, and other geopolitical tensions.

Returning plenty of cash to investors

Apple's near-term revenue growth might be curbed by chip shortages and other supply chain challenges, but it continues to return a large portion of its free cash flow to shareholders with big buybacks and dividends.

During the fourth quarter, Apple bought back $20 billion in shares and paid out $3.6 billion in dividends. For the full year, it bought back $86 billion in shares and reduced its number of outstanding shares by nearly 4%.

Apple ended the year with $191 billion in cash and marketable securities, which gives it plenty of room for future investments or acquisitions. Its forward dividend yield of 0.6% might seem paltry compared to those of other higher-yielding tech dividend stocks, but that lower yield also gives it more freedom for big buybacks and smart investments.

Robust growth at a reasonable valuation

For the full year, Apple's revenue and earnings per share (EPS) increased 33% and 71%, respectively.

But next year, analysts expect its revenue and earnings to only rise 4% and 2%, respectively, as the iPhone faces tougher year-over-year comparisons. That slowdown might seem disappointing, but Apple has always been a cyclical company that relies heavily on hardware upgrade cycles.

I believe Apple's growth cycles will continue as it expands its services ecosystem and enters new markets like augmented reality devices and connected cars, so its stock still looks reasonably valued at 27 times forward earnings. If you agree with that view, then it's smarter to buy Apple's stock after its latest post-earnings dip than to sell it simply because it faces some near-term supply chain challenges.