Source: PaxForex Premium Analytics Portal, Fundamental Insight
The stock market has been very weak so far in 2022. The S&P 500 is down 13% since the beginning of the year, and the Nasdaq Composite, which has many tech stocks that may be more speculative, is down 23% over the same period. Stocks continue to struggle with an unfavorable economic and geopolitical environment that includes 40-year inflation, rising interest rates, and fears of war between Russia and Ukraine.
Even some of the world's leading companies, such as Apple, have been affected by the current macroclimate. The iPhone maker's business is holding up very well compared to other big tech companies like FAANG, Netflix, and Meta Platforms, but the stock has been punished, dropping 18% over the year.
Let's discuss the bullish and bearish arguments for Apple to help investors decide whether they should add these stocks to their portfolios now.
Unlike many other tech companies, Apple's business doesn't seem to be suffering from macroeconomic factors. In the second quarter of 2022, which ended March 26, the company beat analysts' estimates on both revenue and earnings. Both total sales and diluted earnings per share were up 8.6% year-over-year. The tech giant's product segment, which accounts for 80% of total revenue, performed very well during the quarter, as every product category except the iPad saw year-over-year sales growth. The product segment includes the iPhone, Mac, iPad, wearable devices, Home, and accessories.
Apple's services segment, which includes the App Store, Apple Music, Apple TV+, iCloud and other subscriptions, grew rapidly again in the last quarter. Total sales were nearly $20 billion, a 17.3 percent year-over-year increase, and the segment's gross margin rose 254 basis points to 72.6 percent. Steady expansion in the product segment is a plus, but the company's growth trajectory is highly dependent on the service category. Fortunately for Apple and its shareholders, $28.1 billion in cash and cash equivalents provides more than enough funding to keep that business growing.
The latest sell-off has also softened the tech leader's valuation. At the beginning of the year, the stock was trading at 30 times earnings, well above the five-year average price-to-earnings (P/E) ratio of 23.1. Today, however, the P/E ratio is 24.1, which is a much more reasonable estimate.
With a market capitalization of $2.4 trillion, Apple is a huge company, which in turn limits its ability to grow as it has in the past. Analysts expect the company to reach $394 billion in sales in fiscal 2022, a 7.7 percent year-over-year increase, and earnings to rise 9.4 percent to $6.14 per share. In 2023, Wall Street expects total revenue to grow just 5.6% to $416.2 billion and earnings per share to rise 6.8% to $6.56.
Although the stock's P/E ratio has dropped to 24, one could argue that there are more attractive stocks when you consider the growth rate. For example, shares of FAANG's Alphabet are currently trading at 21.2x earnings estimates, with Wall Street analysts predicting the company's earnings will grow 18.7% in 2023. Given expectations that Apple's growth rate will slow down going forward, it's not unreasonable to assume that some investors will end up unfriending the company. And given the company's dividend yield of just 0.60%, it may not attract dividend and value investors.
In today's sagging market, Apple presents investors with a good buying opportunity. Its solid business model, excellent balance sheet, and lower P/E ratio provide compelling reasons to buy the stock right now. Despite the slowdown in growth, I believe the company will continue to deliver above-market returns over the long term. It's time to take advantage of the stock market's short-sightedness and buy shares of this tech giant today.
As long as the price is below 150.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 136.57
- Take Profit 1: 132.00
- Take Profit 2: 125.00
Alternative scenario:
If the level of 150.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 150.00
- Take Profit 1: 156.00
- Take Profit 2: 166.00
