Don’t Bite Yet: Buy Apple Stock if AAPL Falls to This Level

Apple (NASDAQ:AAPL) stock is finally in the grip of the AI fever. The iPhone maker traded at 52-week lows of $164 mid-April. In three months, Apple stock surged by 35% and trades at a forward price-to-earnings ratio of 30.3.

I believe that valuations are stretched, considering the company’s revenue and earnings growth trajectory. A correction seems likely in the coming quarters as stocks return to sane valuations after the AI-driven rally. I would, therefore, avoid Apple stock.

At the same time, I remain positive about the long-term business outlook. A deep correction would be a buying opportunity. Further, Apple’s innovative culture will likely help Apple navigate the challenges and emerge stronger.

Show Me The Growth

Apple products are more about brand pull than brand push. The big question is whether the company’s iPhone continues to have the same brand pull or craze. In 2015, Apple sold 231.2 million units of iPhones globally, up from 231.3 million units last year.

The big question is – has the demand for the iPhone peaked?

In the first quarter, Samsung dethroned Apple to become the top smartphone player globally and accounted for 20% of shipment share. While Apple’s shipments declined, the average selling price touched record first-quarter highs. Higher average selling price is certainly a positive, but it is likely to impact units sold in an intensely competitive market.

Another note is that Apple reported a 19% drop in iPhone sales in China for the first quarter. On the other hand, Huawei saw a 69.7% surge in smartphone sales. It’s worth noting that Huawei suffered in 2019 on the back of U.S. sanctions. Intense competition and geopolitical factors are likely to impact iPhone sales in China.

Analysts at Evercore believe that “AI can help kick off an iPhone supercycle.” It remains to be seen if iPhone can make a strong comeback in the coming years.

Diversification Is a Savior

For the second quarter, Apple reported a 10.3% decline in iPhone sales to $46 billion. Further, Mac and iPad sales declined by 5.8% on a year-over-year basis to $13.1 billion. However, the services segment growth was robust at 14.4% to $23.9 billion.

I believe that Apple is likely to be more diversified in the next five years. That’s likely to support growth and value creation. Estimates also suggest that the global AI wearable market is expected to grow at a compound annual growth rate of 30.4% between 2023 and 2030. Apple is likely to be a key beneficiary of this growth.

Innovation is a growth driver. For example, Apple’s first foldables are expected to come in 2025 and 2026. Further, the company is expected to release a slimmer iPhone next year.

Therefore, I would be cautious on the growth front, but I am certainly not writing off Apple. The company has the financial flexibility to heavily invest in innovation that drives growth across segments.

A Cash Flow Machine

From a valuation and value creation perspective, the bottom line is operating and free cash flows. As of March 2024, Apple reported a cash buffer of $163 billion. Further, operating cash flow for the first six months of 2024 was $62.6 billion. This would imply an annualized operating cash flow potential of $125 billion.

There are multiple positives considering the company’s balance sheet and cash flow. First, Apple can invest heavily in research and development. The continued launch of new iPhone models with enhanced features is likely to ensure stable growth.

Further, Apple made 19 acquisitions in the last five years. Of course, these are not big deals. However, the focus is on acquiring innovation-driven start-ups that help accelerate the company’s product and technology development.

Finally, healthy cash flows will ensure robust dividend growth and sustained value creation through share repurchases.

The Bottom Line: Look For a Correction

A report by PricewaterhouseCoopers suggests that AI could contribute up to $15.7 trillion to the global economy in 2030. The impact is likely to be across sectors, and given the potential, there is scope for wealth creation.

Last month, Apple introduced Apple Intelligence, the “the personal intelligence system for iPhone, iPad, and Mac.” The impact of this move will be seen in the coming quarters. I am personally bullish as AI is introduced in various other devices (including wearable).

However, given the valuations, the best strategy would be to stay on the sidelines and watch for potential growth acceleration. Before the current rally, Apple stock was around $160 to $170. I would be willing to consider exposure if the stock corrects to those levels in the next few quarters.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor held a LONG position in AAPL.