The S&P 500 index has had a pretty strong year so far, as it has risen nearly 10% on a practically straight upward climb. However, one of its largest and most iconic components hasn't had the same success. Apple (AAPL 2.65%) has gone in the opposite direction, down nearly 12% in 2024.
That's a pretty concerning divergence for one of the most important companies in the market, and some investors might question whether this is a legitimate move or an overreaction. So, is it time to take advantage of this drop and buy some Apple stock?
Apple's growth has left investors wanting more
If you've been following Apple for a while, it's clear it hasn't been doing well. In the first quarter of fiscal-year 2024 (ending Dec. 30, 2023), its revenue rose only 2%. In a vacuum, this may be disappointing. But it comes after four straight quarters of declining revenue, so the slight increase was a welcome sight to investors.
Despite a marginal increase in revenue, Apple managed to grow its earnings per share (EPS) by 16%. It did this through two methods: share buybacks and improved income. Over the past year, Apple reduced its share count by about 2.4%. This automatically gives Apple a slight EPS boost. But the biggest gains came from improving its gross margin.
Apple's year-over-year gross profit in Q1 increased by around $3.9 billion on only a $2.4 billion increase in sales. By selling higher-margin products, Apple could roll almost all of those profits to the bottom line, which helped drive the EPS growth.
AAPL Gross Profit Margin (Quarterly) data by YCharts
But this can only go on for so long. While Apple strives to have a higher percentage of its business be subscription products (which usually have higher margins), it's still primarily a smartphone company.
Suppliers can only be squeezed so much before they run out of juice. Once that happens, Apple's gross margin will be stagnant, and its ability to grow its EPS beyond the rate of overall revenue and share buybacks will diminish. This is a problem, as Apple's earnings growth is a key part of its operating thesis. Plus, with its valuation, it desperately needs to maintain that growth.
Apple's stock still isn't cheap
Even after the drawdown, Apple's stock isn't what many would consider cheap.
AAPL PE Ratio data by YCharts
Apple's stock tips the scales at about 26 times forward and trailing earnings. And that's not a good sign. Because these two numbers are practically equal, Wall Street analysts don't expect any earnings growth over the next 12 months.
With the S&P 500 trading for 24 times trailing and 22 times forward earnings, Apple is still valued at a premium to the broader market. With Apple's earnings growth potentially slipping away (at least that's what Wall Street analysts project), it could be a sign that Apple's stock has more room to fall.
Apple needs a new growth driver, whether a new product or a groundbreaking innovation on an existing one. Until it finds its next big thing, Apple's stock may be stuck as it works toward the S&P 500 average price tag.
With that in mind, I think it's fairly obvious that there's no reason to buy Apple stock today. Apple has a lot to prove to investors over the coming quarters, and there's no reason to rush in to get ahead of the move.
