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The 6S blues

6 Jan 2016 By Robert Cyran

The latest doubts about Apple may prove as transitory as the last. The $570 billion iPhone maker’s stock is off 15 percent since the end of November. This week’s concern is that suppliers are cutting production because of sluggish demand for iPhone 6S handsets. Yet Apple has been here before – and the company’s shares look even cheaper this time.

The backdrop is changing. The smartphone market expanded by just under 10 percent last year, according to an estimate from research firm IDC. It was growing more than four times as fast two years earlier. A slowdown like that can be bad for margins and earnings, as gadget makers target users of rivals’ handsets by lowering prices rather than winning new customers.

That said, Apple faced similarly negative sentiment in early 2014. The company has taken to rolling out an all-new model of phone one year – like the iPhone 6 in the fall of 2014 – and a version with less dramatic upgrades the next, like the current 6S models. Look back to the same phase of the last two-year cycle, and Apple’s sales of the 5S in the 2014 fiscal year (which ran to September) were only slightly better than sales of the 5 during the year before.

In the fiscal year after the company introduced its improved iPhone 6 later in 2014, though, the number of units sold jumped by over 30 percent.

Even if the market is now closer to saturation, the manufacturers most at risk are makers of generic handsets powered by the Android operating system. These firms compete on price at low margins. Apple’s proprietary OS, its premium prices and enviable gross margins – 40 percent last quarter – give it a huge buffer.

Apple’s valuation also offers even more insurance now than in early 2014. Then, the stock traded at 12 times estimated earnings, a 25 percent discount to the average price-to-earnings ratio of the S&P 500 Index. The current Apple forward PE ratio, at just above 10 times, is a third below the index’s 16 times average. Apple’s stock surged during 2014 as investor attention shifted to the debut of the fully revamped iPhone 6 – not to mention the company’s hefty share buybacks. There’s no guarantee of a repeat, but the mood around Apple’s stock is once again too sour.


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