Apple: The Pullback You Wanted (NASDAQ:AAPL)

Apple: The Pullback You Wanted (NASDAQ:AAPL)


More than $400 billion in market cap has been wiped out.

Valuation still elevated, but no longer extreme.

New products could come as early as next week.

Technology giant Apple (NASDAQ:AAPL) had been one of the market’s biggest winners in the past few months. The company’s Q3 report and stock split announcement sent the stock to a new all-time high above a split-adjusted $100, and the rally continued to nearly $138. Since then, markets have rolled over a bit, with Apple being one of the main culprits. The good news is that many investors were looking for a pullback to accumulate more of the stock, and that opportunity is now here.

Regardless of what you believe the reason is for the pullback, Apple and Tesla (TSLA) peaked and then turned lower a day after their stock splits became effective. Apple shares are down more than 18% from their high last week, although Monday’s close was still a couple of bucks above last Friday’s low. For now, the stock has been able to stay above its 50-day moving average as seen in the chart below. However, that key technical level is a lot closer than it was just a few days ago.

(Source: Yahoo! Finance)

It likely was just a matter of time before Apple and the market pulled back. As I mentioned in a previous article, the company’s valuation had significantly expanded so far in 2020. If we look at the price to earnings ratio for the fiscal 2021 period (ending September 2021), Apple’s forward P/E had gone from 19.7 at the start of calendar 2020 to more than 35.7 at the recent peak. At Monday’s close, the current valuation was down to 29.2 times forward earnings, which is still a lot for Apple given its longer-term history, but it’s a bit more reasonable than it was.

I certainly will be watching to see if management took advantage of this pullback for the buyback. While shares have only come back to where they were a month ago, every little bit helps when you are buying back $20 billion or so in shares a quarter. The stock remains well above where shares were bought back during the past couple of years, but pullbacks like these can help over time.

Should the stock continue lower in the near term, it’s possible we could see an announcement that the company has entered into an accelerated repurchase agreement plan. This would be management’s signal that it believes the stock has come down too much, and could help to put a floor in the stock for now. We’ve seen the company do this before, and chip giant Intel (INTC) recently did a similar thing on a larger scale when its shares dropped considerably after an earnings report.

For Apple right now, investors should focus on the next set of product launches coming in the next few weeks. 5G compatible iPhones should be available to consumers in less than two months, and the potential upgrade supercycle is one reason the stock has done so well lately. Even with the coronavirus, Apple sales have held up extremely well, so a good phone launch could lead to new revenue and/or earnings records. On Tuesday, we received news that an event has been scheduled for next week, which could be the unveiling of a new iPad for the holiday shopping season.

In the end, Apple investors that were looking for a pullback certainly have an opportunity in front of them. Shares have lost nearly 20% from their all-time high reached just last week. This puts the name just a stone’s throw away from its 50-day moving average, which could provide some technical support in the near term. While the long-term valuation is still elevated, it is no longer extreme, and this is a business that has solid fundamentals. With new products just around the corner and the best capital return program out there, Apple shares remain a good long-term buy.

Disclosure: I am/we are long TECL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author currently long TECL, which has some exposure to AAPL and INTC. Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

Originally published on Seeking Alpha

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