Image source: Apple.
Tiger Global is one of the most famous and influential hedge funds in the world. According to recent regulatory filings, the fund started a new position in Apple (AAPL -0.81%) during the fourth quarter of of 2015, buying 10.6 million shares in the company for a market value of around $1.1 billion based on prices as of Dec. 31, 2015.
Investing professionals can make mistakes just like everyone else, in fact, they frequently do. This means that investors need to always do their own homework as opposed to blindly replicating the positions of others, no matter how successful and prestigious. On the other hand, there is nothing wrong with taking a look at what hedge funds are doing in search for investing ideas, and Apple stock looks like a compelling purchase at current prices.
Why Apple looks undervalued
Apple stock is down by nearly 27% from its highs of the last year, and valuation looks remarkably attractive. It trades at a price-to-earnings ratio around 10.3, a major discount versus the average company in the S&P 500 index, which carries a P/E ratio near 18.
The main reason for such a pessimistic valuation is that growth is slowing down. Apple reported $75.8 billion in revenue during the first quarter of fiscal year 2016, an increase of only 2% from $74.6 billion in the same quarter during the prior year. Most of this weakness was due to foreign currency fluctuations, since sales in constant currency grew by a much stronger 8%. However, the fact remains that growth is clearly decelerating.
For the second quarter of fiscal 2016, meaning the quarter ending in March 2016, management is expecting revenue to be in the range of $50 billion to $53 billion. This would represent a decline of 14% to 9% versus $58 billion in revenue during quarter ended in March 2015. If sales numbers turn out to be in line with guidance, this will be the first time in more than a decade that Apple reports declining revenue figures, and this is arguably the biggest reason for all the negativity currently weighting on Apple stock.
Is this an opportunity for investors?
Apple makes almost 70% of revenue from the iPhone, and the smartphone industry is maturing. This has negative implications when it comes to growth potential for different players in the industry, so the years of explosive expansion are most probably in the past for Apple.
The company is also going through a very particular phase. The iPhone 6 was a booming success for Apple in 2015. Since many consumers were eagerly awaiting an iPhone model with a larger screen, sales were exceptionally high for this product. As a reference, Apple sold 74.8 million iPhones last quarter -- that's up by nearly 47% from unit sales during the same quarter two years ago. Even if growth is slowing down, sales volume are nothing short of gargantuan.
The iPhone 6s is no game changer in comparison to the iPhone 6, so year-over-year comparisons will probably remain challenging in the coming quarters. Nevertheless, Apple customers are remarkably loyal to the brand, and nearly 60% of iPhone users have not upgraded to the iPhone 6 or iPhone 6s models yet.
According to a survey by Gallup, 51% of iPhone users in the U.S. upgrade their smartphones as soon as the carrier company allows them to do so, usually every two years. This means growth should improve due to model renewals over the coming years.
There are over 1 billion active Apple devices in circulation nowadays. This is a major positive for the company in terms of both hardware renewal sales in the future and opportunities in areas like software and services. Apple reported a big increase of 25% in sales from the services segment last quarter. This division still accounts for a modest 8% of total revenue, but chances are that it will continue to outgrow other segments and make stronger contributions to overall revenue growth in the years ahead.
The main idea is that Apple is priced for undemanding expectations due to fears about slowing growth in the coming quarter, but the company's long-term future does not look as dismal as current valuation indicates. The recent decline in Apple stock looks like a buying opportunity for long-term investors, so Tiger Global seems to be making a smart decision.
