Apple Stock Is Cheaper Than Microsoft and IBM: Are Investors Overreacting to Slowing iPhone Sales - Or Are They Right?

Word is leaking out from Apple suppliers that orders for iPhone components are slowing meaning the same thing must be happening to sales. This has driven investors to unload the once unassailable stock on the theory that the iPhone is the primary driver of the company's prosperity.

There is some truth to that - and the fact that saturation has been reached in some markets infers that sales of the phone itself would inevitably tail off. But that same logic ignores the fact that sales from the iPhone app store reached $1.1 billion over the holidays, suggesting there is some life in the old dawg yet. In reality, the future is probably more in app store intangibles than in the tangible hardware, mirroring the experience of manufacturers in other industries who, at some point in the product life cycle, begin to harvest more profits from the services wrapped around the product than from the device itself. Welcome to the service economy. JL

Dan Gallagher reports in the Wall Street Journal:

Apple is now the cheapest stock among the 10 largest tech companies in the S&P 500, once its huge net cash pile of $150 billion is excluded. That means Apple is cheaper than other growth-challenged giants like Microsoft, Oracle, Cisco and IBM.
Apple is known for brutal efficiency, regularly killing off features and products that no longer serve its purposes.
So there is irony in the fact investors have taken a similarly ruthless view of Apple itself, penalizing the company heavily ahead of what is expected to be the slowest year on record for its key product: the iPhone. Apple’s share price ended 2015 down 4.6%, marking its first drop in seven years. That selloff looks overdone, even if one accepts the prevailing view that the iPhone 6s won’t sell at a pace anything like that of its predecessor.
Consider that Apple is now the cheapest stock among the 10 largest tech companies in the S&P 500, once its huge net cash pile of $150 billion is excluded. That means Apple is cheaper than other growth-challenged giants like Microsoft, MSFT -1.82 % Oracle, ORCL 0.51 % Cisco Systems CSCO -1.07 % and International Business Machines. IBM -0.50 %
Granted, Apple investors don’t always pay close attention to fundamentals. And it is hard to tune out recent signals on the product line that drives about two-thirds of the company’s revenue. In its last earnings report, Apple projected that revenue would grow less than 4% year over year for the quarter ended Dec. 26. That would be the company’s slowest holiday quarter in 15 years, and a poor indicator for the reception of the iPhone 6S, which launched just before the start of the period.
Signs haven’t gotten any better since that forecast. Dialog Semiconductor, DLG -8.83 % which makes power-management chips used in the iPhone, cut its fourth-quarter revenue forecast by 11% on Dec. 15. Several brokers since then have reported order cuts within Apple’s supply chain. Wall Street now expects iPhone unit sales to grow by only 2% year over year in the December quarter and to actually fall 5% in the March period. That would be the first time the popular smartphone has notched a sales decline since its launch in 2007.

That may sound bleak. But Apple’s current market value more than prices that in. Tech investors have been gravitating toward growth stories; Amazon and Netflix NFLX 9.31 % more than doubled in 2015 while Apple languished. But while rapid growth may be sexy, raw earnings power shouldn’t be discounted. And Apple earned more in its last quarter than those two companies have in their entire existence combined. At a record 50% discount to the Nasdaq, NDAQ -0.30 % as a multiple of forward earnings, Apple now sits deep in the bargain bin. Investors should fish it back out.