AAPL's stock price has now fallen a massive 28% from its July 2015 peak with many investors wondering if the party is over. And what a party it has been. The company's revenues have grown at a compound annual rate of 25% p.a. over the past 5 years whilst return on equity has consistently been in the top decile versus the market. Return on Equity was an impressive 43% in 2015. With this extraordinary track record AAPL has arguably established itself as the greatest consumer success story of all time.
Beyond the general market nervousness we have seen in recent weeks, the main fundamental reason for the large fall in APPL's stock price was slower than expected Q1 2016 (calendar Q4 2015) revenue growth of 1.7%. It was an unusual quarter for APPL as the company lost market share in the global smart phone market for the first time in many quarters. The market has grown comfortable assuming APPL with report better than expected revenue growth quarter after quarter driven by fast growing iPhone sales. However, APPL's Q1 iPhone sales, which represent a massive two thirds of group revenues, grew only 0.4% in a market which grew by 5.7% largely reflecting market share gains by emerging heavyweight Huawei. Huawei reported 37% revenue growth in the quarter benefitting from its partnership with Alphabet to manufacture the high-end Nexus 6P.
At this point the big question for APPL investors is whether this is a short term sales growth blip or a longer term slowdown? If history is any guide, periods of AAPL sales growth slowdowns tend to last for 2-4 quarters and are then followed by a dramatic pick-up in sales. 2013 was a great example of a period of slower sales growth which created a great buying opportunity in the stock ahead of sales growth escalation. Savvy investors who bought into the weakness at that time more than doubled their money over the next 2 years. Interestingly APPL's patent application pipeline appears to be as strong as it did during the 2013 slowdown with many new iPhone features and applications being developed. e.g. iPhones may soon be able to detect temperature and pressure amongst other things. Apple management clearly remain confident regarding future revenue growth and are working hard to ensure new product development is supportive.
The stock is currently trading at 10x '15 earnings and if you exclude the company's huge net cash pile of $160bn the stock is trading at only 7x '15 earnings, which is around two thirds lower than the current average S&P 500 p/e of 21x. The market is obviously pricing in a prolonged period of slower growth for APPL. However, our analysis suggests this may prove overly bearish. APPL is likely to continue buying back stock, and the company's p/e ratio is likely to continue trending lower each year reflecting a combination of earnings growth and less shares on issue. The stock is shaping up as a value investor's paradise.