Investors have headed for the exits recently in wake of record-breaking inflation, rising interest rates, and fear tied to the war between Russia and Ukraine. Even big tech -- which appeared invincible up to this point -- has lost its mojo. Consider the FAANG stocks: Meta Platforms (aka Facebook), Amazon, Apple (AAPL 0.64%), Netflix, and Alphabet. If you own a portfolio of these five premier U.S. technology stocks in equal weights, the portfolio would be down 40% over a six-month span.
Apple is the only FAANG stock that hasn't faced notable downward price pressure in recent months. It's undeniable that Apple is one of the world's most prominent companies. The stock has generated a total return of nearly 775%, including dividends reinvested, over the last decade, translating to an annualized return of 24%, and remarkably higher than the S&P 500's 268% rise over the same timeframe. That said, investors shouldn't flock to the tech giant just yet. Given its decelerating growth and mediocre valuation, there are finer buying opportunities available on the stock market today.
On that note, let's examine the company's current financial condition and valuation to paint a clearer picture for investors moving forward.
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Slowing growth
Given the magnitude of Apple's business, it's inevitable that the company's growth is unwinding. After all, its $2.3 trillion market capitalization equates to nearly 11% of the United States' 2020 GDP, and nearly trumps that of the United Kingdom. In its most recent quarter, the company posted a total revenue of $97.3 billion and earnings per share (EPS) of $1.52, beating consensus estimates by 4% and 6%, respectively. The company grew in each of its product categories except iPad, but its services segment stole the show, souring 17% to an all-time revenue record of $19.8 billion. Despite the reliability of its core product categories iPhone, iPad, and Mac, Apple's services segment serves as its catalyst for future growth.
For the full fiscal year 2022, analysts are forecasting revenue to climb 8% from FY 2021 levels, to $394.2 billion and earnings per share to increase 10% to $6.15. Looking ahead, growth is expected to retrogress. Wall Street analysts are projecting Apple's top line to reach $460.2 billion in fiscal 2025, implying an average annualized growth rate of just 5% from this past year. Likewise, earnings are expected to grow at an average 6% annually over the same time period.
In the near term, CEO Tim Cook cautioned investors that COVID outbreaks in China could compress demand and lead to supply chain issues, putting pressure on sales for the remainder of 2022. In the long run, the law of large numbers is not working in Apple's favor. Unless it expands into new segments, the company's core business will not grow at the same rate it once did.
Apple's valuation is approaching buy levels
Shares of the tech behemoth are not favorably priced, at least yet. The stock is trading at 24 times forward earnings, which is particularly higher than most of its FAANG peers. However, it's reasonable to argue that Apple has earned the right to trade at a premium today provided the resiliency and growth outlook of its business compared to other big tech companies in recent quarters. However, looking at historical multiples, Apple's forward price-to-earnings multiple of 24 is slightly above its five-year average of 23.
Data by YCharts.
While the company is approaching the buy zone, investors should delay purchasing the stock until it sinks below its historical average earnings multiple. When that happens, investors should feel comfortable pouncing on the technology leader.
Be patient with Apple
Apple's resiliency at a time where most big tech companies are struggling is not something investors should ignore. Apart from the stability of its core business, the company enjoys an abundance of resources to help expand into new segments moving forward. Slowly but surely, Apple's valuation is becoming more attractive. And once its price-to-earnings multiple falls below historical averages, investors shouldn't hesitate to scoop up shares of this world-class tech stock.
