The share price of Apple (NASDAQ: AAPL), the former market capitalization heavyweight champion, has fallen over 20 percent in the last twelve months. This sharp decrease has been attributed to the slowing Chinese economy, flat Iphone sales, as well as the company’s transition from a growth to value stock.
In the latest quarterly report, Iphone sales made up 68 percent of Apple’s total revenues and therefore any threats to its status as the crown jewel of the smartphone community have worried investors. Given the recent positive reviews of Samsung Galaxy S7 and LG G5, the emergence of budget smartphones and the fact that the Iphone 7 will only be launching in second half of 2016, Apple’s potential returns may look less than juicy, in the short term at least.
However, things are not as dire as current market valuations suggest. Though the new 4-inch Iphone SE as well as reports of a discounted Iphone 5s will reduce profit margins, Apple’s strength has always been building customer loyalty. Apple is betting that as China moves towards a consumer economy and its citizens get richer, more will graduate to the premium offerings. Furthermore given Beijing’s new status as the billionaire capital of world and the expensive tastes of the young elite, the IPhone is unlikely to be going out of style soon.
Apple’s position in India will have also strengthened due to the recent setbacks faced by budget smartphone makers. Ringing Bells, the company behind the $4 smartphone was accused of fraud and had to refund all the money received from pre-bookings. Earlier this week, the promoters of MangoPhone, previously deemed the Iphone killer, have been arrested for defrauding the Bank of Baroda and submitting false loan documents. Given Apple’s recent role as defender of consumer privacy, the discounting of the Iphone 5s, and the company’s strong brand recognition, Iphone’s market share in the Indian market should rise offsetting the decrease in margins.
In addition to capital appreciation, holding Apple in one’s basket will also provide consistent income. Apple has increased its dividends by an annualized 11 percent in the past two years and given the company’s TTM free cash flow of $63 billion, there is ample of room for another healthy increase. I believe patient investors will be rewarded with fruitful returns however one should be prepared for sideways movements in the short-term.
Disclosure: I am/we are long AAPL.