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Apple Is Down 11% Just Because iPhone Sales Have Declined

By Motley Fool Staff - May 6, 2016 at 7:42AM

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The market may be punishing the stock too much for something the company should turn around in the fall.

Last week, Apple (AAPL -2.98%) reported declining iPhone sales for the first time since its release in 2007 -- and its stock has taken a dip on the news.

The drop is a big deal because such a large percentage of the company's total revenue comes from its phone. That said, it's also possible the market has reacted too strongly because Apple is working on a "s" release, not a revamped iPhone. In a broad sense, the big, numbered updates sell better than the smaller off-year tweaks.

In this segment from the Motley Fool Money radio show, Chris Hill, Ron Gross, Matt Argersinger, and Jeff Fischer explain not only why the market is overreacting to the earnings report, but also why the performance of the iPhone 7 is going to be critical for the company.

A transcript follows the video.

This podcast was recorded on April 29, 2016. 

Chris Hill: Apple sold 51 million iPhones in the second quarter, and that was not nearly enough. Shares are down 11% this week.

Ron Gross: Why do I get the bad company?

Matt Argersinger: (laughs) "Bad company," a wreck!

Gross: (laughs) The best company ever that had a bad week.

Hill: Was it really that bad? Or is this an overreaction?

Gross: They're up against tough comparisons, because last year was so strong. But there's no denying that this is the first time that Apple reported declining revenue in 13 years. First quarter with declining iPhone sales since they were introduced in 2007. So, there's fear going on about slowing growth, negative growth, China's a big part of that. Carl Icahn has exited his entire position, mostly out of fear of China, I believe -- although, he did make comments that he still thought it was a great business (laughs) and probably undervalued. So, tuck that on both sides.

All those things are true. And again, I always say, we're not cheerleaders, we're analysts. You have to look at all the good and the bad. Even with these results, they've still put up $11.6 billion of operating cash flow during the quarter, and returned $10 billion to shareholders via dividends and buybacks, which have increased once again. Their buyback programs have increased, and their dividend rate. They continue to return so much money to shareholders. Stock's only at 10.5 times earnings. 

Now, if they're a company that has declining revenue into the future, well, I guess that makes sense. But if the iPhone 7 is strong, and they continue to be an innovative company, to me, that says that's an awfully cheap stock.

Matt Argersinger: One number, though -- $233 billion. That's cash and long-term securities. Now, I know a lot of that is overseas, and they'll pay a hefty tax bill if they bring it back. But, I mean, I could have said this a month ago, and I would have been dead wrong. I just can't believe there's any downside to this business, given their dominant position, and given the balance sheet. But, hey, I've been wrong so far.

Jeff Fischer: Yeah, Ron really hit it on the head, though, when he said the iPhone 7 has to be a hit. And then, the rumored 8, which has many advances, supposedly, including virtual reality to some extent. Those both have to do really well. But, really, it's the iPhone 7 this fall that has to do well enough, because this next quarter they forecast to be even weaker than the last one, with quite a drop in iPhone sales again. 

One concern I have is, Apple has put out so many different phone models lately. They kind of have to, because they have such a giant consumer base. But it does dilute the message of what they're selling.

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