Since the last week of December, the value of Apple (NASDAQ: AAPL) has slumped. In fact, during that period, the Apple stock price has dropped by a third.
Still, the tech giant’s shares are slightly higher than they were a year ago – and 157% up over the past five years.
Is the recent fall a good opportunity to add the shares back into my portfolio? Or might they still be overvalued, given the strong five-year performance?
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Looking to the long term
I mentioned above that I am looking for a chance to add Apple stock back to my portfolio if I can do so at the right price.
I have owned shares in the tech giant before and continue to think it is an outstanding company.
It operates in a market that is huge and likely to get even bigger over time. By developing a limited portfolio of premium-priced products, Apple has been able to achieve high profit margins. A unique brand and proprietary technology combined with an ecosystem of services has helped build customer loyalty.
The recent fall reflects what I see as real risks. Tariffs could eat into Apple’s juicy profit margins, while lower-cost Chinese competitors may be able to take some of its market share as the economy falters.
I see these as relatively short- or medium-term challenges, though. As a long-term investor, I continue to see Apple as an excellent business with strong competitive advantages.
Great business, not yet an attractive price
I may be wrong about that. Whenever buying a share, I aim to pay a price that I think offers me some margin of safety in case I have underestimated the risks involved.
When it comes to Apple stock right now, it is still not yet at an attractive enough price for me to be comfortable buying.
That is not because I think it may have further to fall based on recent stock market nervousness. That does not bother me, if I am confident enough in the long-term investment case.
Rather, my concern is about the price compared to what I think the business is worth.
At the moment, Apple trades on a price-to-earnings (P/E) ratio of 27. Yes, there is a dividend as well, but as the yield is 0.6%, that has little bearing on my calculation of value.
A P/E ratio of 27 strikes me as high even for a company of Apple’s quality. I do not feel it offers me sufficient margin of safety for the risks the business faces.
Apple’s net income has fallen for the past two years in a row. The latest risks emerging from US trade policy could mean another drop this year and perhaps beyond.
While profits remain huge and margins attractive, this is not a fast-growing company that I think merits a large growth premium. It is a successful but mature business that has its work cut out just to maintain earnings at their current level in a fast-changing environment.
If the price is right, I will buy Apple stock again in a heartbeat. For now,though, I still see it as overpriced.
