It has been a tough week for Apple (NASDAQ:AAPL). The 6.4% drop in Apple stock over the past two days is the largest in the past month, based on reports of China banning some of its products. Yet when I look at a long-term chart over several years, any dips like this one have been quickly bought by investors. Here’s why I think the same thing could happen again.
The China story is mostly noise
Let’s understand the facts about the China ban first. It’s not law yet, with the Government simply at the planning stage at the moment. It wants to ban the use of iPhone in sensitive government departments and also in state-owned enterprises.
We don’t know if this will simply mean telling workers not to bring their personal iPhones to work, or if they won’t be allowed to own an iPhone.
So there’s still a lot of uncertainty about the plans. But headlines that state China is banning iPhones seem to have led to a complete investor overreaction, I feel.
When the initial panic subsides, I think Apple shares will be higher than the current price. The fear sparked by the initial news should pass, with investors again confident about buying.
Revenue is well diversified
Some have pointed to China as a reason to sell Apple shares for a different reason though. The economic slowdown in the country is leading some to panic about the negative impact this will have on revenue for the firm.
Yet even though China is a good market for Apple, it’s not the biggest by any stretch. For many years, the Americas has been the largest market, followed by Europe. China comes in third.
Looking forward, a weaker Chinese economy — of course — won’t help Apple. This is a risk that’s valid for investors to consider. But does it justify such a sell-off that has wiped almost $200bn off the market cap of the company? I don’t think so.
Value investors will likely pick up on this point and could use it as an opportunity to buy the dip.
It’s not expensive… relatively speaking
Even though Apple shares are up 15% over the past year, I’d argue that the stock isn’t overvalued. It has a price-to-earnings ratio of 29.8. This is above the Nasdaq 100 index average of 23.1 and from that angle, some would say that buying now is a risk.
However, let’s compare it to some sector competitors: Alphabet has a ratio of 28.7, with Microsoft at 33.8 and IBM at a whopping 71! So Apple is fairly valued in my eyes.
What this means is that if we see the share price slide further in coming days, I think it could represent a good dip to consider buying as a slightly undervalued purchase for the future.
