Please ensure Javascript is enabled for purposes of website accessibility

If iPhone Sales Rebound, Apple Inc. Stock Is Ridiculously Cheap

By Ashraf Eassa - Feb 6, 2016 at 11:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors should keep a close eye on the iDevice maker's upcoming iPhones, as their performance in the marketplace could make-or-break Apple stock.

As of writing, shares of Apple (AAPL -0.14%) trade at a hair more than 10 times trailing-12-month earnings. Ex-cash -- and Apple has around $150 billion in net cash on the books -- the stock looks almost comically cheap.

However, as Apple is very widely followed by many investment professionals, it's hard to imagine that the stock is significantly mispriced either to the upside or to the downside. I believe that this valuation reflects the significant uncertainty that now exists around Apple's iPhone business, which is expected to see a year-over-year decline for the first time ever during the company's fiscal second quarter.

In my view, the fate of Apple stock during the next 12-18 months will be determined by the answer to one simple question: Will iPhone sales return to growth in fiscal year 2017?

If "yes," Apple stock is just ridiculously cheap
There's every chance that the relatively poor performance that everybody expects from iPhone during fiscal year 2016 is due to simply a "perfect storm" of negative factors that aren't likely to repeat anytime soon.

In the current cycle, Apple is facing two major headwinds according to management:

  1. Macroeconomic situation -- Apple executives on the company's most recent earnings call could not stress enough that Apple is currently facing some very difficult (Tim Cook referred to them as "extreme") macroeconomic headwinds.
  2. High bar to clear -- During the call, Cook acknowledged that the immense demand for the iPhone 6/6 Plus last year, as Apple satisfied the long pent-up demand for larger iPhones, is making for some very tough year-over-year comparisons during this product cycle.

Although it's really tough to make a call at this point about how the macroeconomic situation will trend over the next year or so, a nice "side-effect" of what will likely be a down year for iPhone is that the bar won't be set so high.

Additionally, Apple will have the benefit of fiscal year 2017 being a year in which the company introduces a "new number" phone, which should have significant internal improvements, as well as external improvements (industrial design, display, and so on).

At any rate, I believe that if Apple can demonstrate a return to growth in iPhone in the coming fiscal year, then this should allow investors to be more confident in the longer-term future of Apple's iPhone franchise.

If "no"...
If Apple suffers yet another year-over-year decline in iPhones in the coming fiscal year, then I can't imagine that investors will take this well. Apple is cheap now, but significant deterioration in iPhone shipments, and ultimately revenue, will have a major impact on Apple's net income.

At this point, I could see Apple getting hit with a double whammy: earnings multiple compression even from current very low levels -- remember that rival Samsung (NASDAQOTH: SSNLF) trades at around 8.33 times earnings and also has a very large net cash position -- in addition to earnings declines.

This could ultimately be a recipe for a steep decline in Apple's share price.

Watch the iPhone 7 closely
Apple surely realizes at this point the importance of the iPhone 7 to "setting the tone" for the company's business, and ultimately, its share price in the years ahead. I think it will be important for Apple stockholders to pay special attention to the various iPhone 7 "leaks" in the coming months in order to get a good picture of whether the iPhone 7/7 Plus will be enough of a "game changer" to catalyze iPhone unit-shipment growth.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.35 (-0.14%) $0.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.