Tech giant Apple (AAPL 0.83%) has proven resilient, holding up better than the Nasdaq Composite over the past year. However, even Apple stock has slipped over the past six months, down more than 20% since the beginning of 2022.
Apple is an obvious winner and one of the largest companies in the world today. Is the recent decline a buying opportunity or a sign of prolonged danger on the horizon?
Here is why investors should pause before rushing to buy that dip in the stock price.
Apple's shares aren't cheap yet
Investors have enjoyed a solid stretch from Apple over the past three years; the stock has been up more than 170%. However, the stock has outrun the company's growth, and you can see below how the stock's price-to-earnings (P/E) ratio has exploded since the pandemic began in early 2020.
AAPL P/E Ratio data by YCharts.
You can also see how the recent dip has begun pulling that valuation back to earth. However, it's still hard to say that Apple has become cheap. The current P/E ratio of 22 is still higher than the stock's decade median of 16.
Whenever a stock trades above or below its historical valuations, investors must ask themselves whether the fundamentals have changed to justify it or if the stock is more likely to revert to its historical trends.
In Apple's case, the bear market could squeeze more juice from the valuation. Here's why.
NASDAQ: AAPL
Key Data Points
Trying to clear a high bar
Apple's revenue can be cyclical, with periods of peaks and valleys because major iPhone updates can cause many consumers to upgrade their devices. For example, Apple's first iPhone with 5G compatibility was announced at the end of 2020 (iPhone 12). That and the iPhone 13 caused a significant growth spurt that pushed revenue growth to its highest in a decade.
AAPL Revenue (Quarterly YOY Growth) data by YCharts.
The higher growth helped drive the stock's valuation as high as it went, but now the company is coming down on the other side of that spurt. With most iPhone financing plans spanning one to two years, many consumers have already upgraded to new devices, and you can see the revenue growth plummeting in the above chart as the cycle turns over.
Wall Street analysts project Apple to grow revenue at a mid-single-digit rate over the next several years. This trickles down to the bottom line; analysts believe earnings-per-share (EPS) will grow at an estimated annual growth rate of 12% over the next three to five years.
Apple has grown EPS by an average of 15% per year over the past decade, so it's hard to justify a higher P/E ratio for the stock with growth potentially slowing.
A luxury versus a necessity
Tightening consumer spending could potentially pour more cold water on near-term demand for iPhones. It's no secret that inflation is rampant, and consumer sentiment is currently its lowest on record, going back to 1980 for a comparable measurement.
US Index of Consumer Sentiment data by YCharts.
I'm an iPhone user, and while I love it, I see my smartphone as a luxury more than a necessity. I don't think it's a stretch to say that a new iPhone isn't high on the priority list for many households when times are tough, though Apple has introduced an entry-level device to combat this.
This isn't to say that Apple isn't a fantastic business; it remains a powerhouse with a robust ecosystem of devices and software that's highly lucrative. But it seems more is going against Apple now than for it.
Apple's stock has begun to slide, and the fact that it accounts for 12% of the Nasdaq-100 makes its resiliency over the past year much more impressive. But don't rush to buy the dip because there's a good chance shares could still head lower. Instead, consider a dollar-cost average strategy to build a position slowly, so you don't catch a proverbial falling knife.
