The stock market is having a very lackluster 2022 so far. The S&P 500 has contracted 13% since the start of the year, and the Nasdaq Composite, which is heavy with technology stocks, which can be more speculative, has toppled 23% in the same time frame. Equities continue to battle an unfavorable economic and geopolitical environment that includes 40-year high inflation, higher interest rates, and concerns about the war between Russia and Ukraine.
Even some of the world’s star companies, like Apple (NASDAQ: AAPL), have been wounded by the current macro climate. The iPhone maker’s business has held up very nicely compared to other big tech companies like FAANG counterparts Netflix and Meta Platforms, yet the stock has been punished, sinking 18% year to date.
Let’s discuss Apple’s bull and bear case to help investors decide if they should add the stock to their portfolios now.
What’s looking good?
Unlike many of its technology peers, Apple’s business hasn’t seemed to suffer from the macro headwinds. In its second quarter of 2022, which ended on March 26, the company beat analysts’ estimates for both revenue and earnings. Both total sales and diluted earnings per share grew 8.6% year over year in the quarter. The tech giant’s products segment, which represented 80% of total revenue, had a very strong outing during the quarter, as each product category, excluding iPad, experienced sales growth year over year. The products segment includes iPhone, Mac, iPad, and wearables, Home, and accessories.
Apple’s services segment, which includes the App Store, Apple Music, Apple TV+, iCloud, and other subscription businesses, expanded at a rapid clip once again in the most recent quarter. Its total sales were nearly $20 billion, equal to 17.3% growth year over year, and the segment’s gross margin expanded 254 basis points to 72.6%. Steady expansion from its products segment is a plus, but the company’s growth trajectory is highly dependent on its services category. Fortunately for Apple and its shareholders, the company’s $28.1 billion in cash and cash equivalents provides more than enough funding to develop this business further.
The latest sell-off has also soothed the tech leader’s valuation. At the start of the year, the company was trading around 30 times earnings, which is notably higher than its five-year mean price-to-earnings (P/E) multiple of 23.1. Today, however, the stock has a P/E of 24.1, which represents a much more reasonable valuation.
What’s keeping investors away?
Boasting a market capitalization of $2.4 trillion, Apple is an enormous company, which in turn limits its ability to grow like it once did. Analysts expect the tech juggernaut’s top line to reach $394 billion in fiscal year 2022, indicating 7.7% growth year over year, and its bottom line to increase 9.4% to $6.14 per share. In 2023, Wall Street projects total revenue to climb just 5.6% to $416.2 billion and earnings per share to ascend 6.8% to $6.56.
While the stock’s P/E has dropped to around 24, one could argue that there are more attractively priced stocks out there when considering growth rates. For instance, its fellow FAANG peer Alphabet is currently trading at 21.2 times earnings while projected to grow its bottom line by 18.7% in 2023, according to Wall Street analysts. With expectations that growth will continue to slow for Apple moving forward, it’s not unreasonable to assume that certain investors will eventually fall out of love with the stock. And provided its subpar dividend yield of only 0.60%, the company may not be able to attract dividend and value investors, either.
I believe in the long-term picture
In today’s sagging market, Apple extends investors a valid buying opportunity. Its resilient business model, extraordinary balance sheet, and lower P/E serve as compelling reasons to buy the stock right now. Despite its slowing growth, I believe the company will continue to deliver market-beating returns in the long run. It’s time to take advantage of the stock market’s shortsightedness by accumulating shares of this tech giant today.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Luke Meindl has positions in Apple. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Meta Platforms, Inc., and Netflix. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.