Do Slow iPhone 14 Sales Mean Long-Term Trouble for Apple?

Apple (NASDAQ: AAPL) has apparently seen slower than expected sales for its iPhone 14 and iPhone 14 Plus models. Given that high inflation is squeezing many consumers’ pocketbooks and that Apple has a reputation of creating both high-cost and high-quality products, this probably shouldn't be much of a surprise.

After all, because Apple’s products are generally high quality, many folks are able to hold on to their older model phones for a little while longer, delaying replacements. Since even the cheapest iPhone 14 starts at $799, it’s a big enough purchase that most people need to at least think about it before they spend it. Add inflation pressures on everyday expenses to the mix, and owning the latest and greatest iPhone looks more like a nice to have than an absolute necessity.

That combination of factors raises a key question about Apple -- do those slower-than-expected iPhone 14 sales mean long-term trouble for Apple? On the surface, it certainly seems like it could be. After all, Apple’s stock has been in a downtrend since the iPhone 14 launched. Since the market tries to be forward-looking, that downtrend is a sign that many investors are nervous.

A speedbump, not a dead-end

On the flip side, while iPhone sales make up the majority of Apple’s revenue, its profit margin on its products is well below the margin it makes on the services side of its business. In the June quarter -- the most recent that Apple has reported -- its services revenue provided all of the growth in both the company’s top and bottom line.

As a result, even though iPhone sales may be below expectations, Apple’s growing services revenue helps offset some of those challenges and buffer the company’s bottom line. In addition, Apple’s share of the US smartphone market recently hit an all-time high, boding well for those services' revenue continuing to grow. After all, you don’t need the latest and greatest phone to buy apps or subscriptions for it, and the higher Apple’s market share, the larger its share of those services it can potentially get.

Put it all together, it means that even with the softness of the iPhone 14, analysts expect Apple to be able to grow its profits at around a 9.5% annualized pace over the next five years. Add that anticipated profit growth with the recent downtrend in its stock price, and Apple just might be reaching a point where it looks like a reasonable value to consider buying.

What’s the company worth?

As recently discussed, you can use a discounted cash flow model to estimate what a company’s stock is really worth, based on its ability to generate cold, hard cash over time. Using analysts’ expected 2023 profits of $6.47 per share along with that estimated 9.5% annualized profit growth rate as a starting point, we can run that exercise for Apple.

The table below shows the outcome of one such model. It starts with 2023 earnings and a 9.5% growth rate for the first five years, then tapers off to 6.5% earnings over the next five, and finally 3.5% in perpetuity beyond that. It assumes that an investor requires a 10% annualized return on his or her investment in Apple, which serves as the discount rate in the calculation.

What that means is that if Apple manages to deliver to those expectations, an investor seeking a 10% annualized return would be willing to pay as much as $133.62 per share right now to buy its stock. Apple’s shares recently closed at $138.38, which is within spitting distance of that fair value estimate.

It’s important to recognize that any value estimate is a projection of the future, and reality may turn out wildly different than that projection. Still, with Apple’s stock price hovering very close to this estimate, there’s good reason to consider whether it may be worthwhile to open a position. After all, the future might turn out even better than these expectations. If that happens, Apple’s recent price may well turn out to be a bargain.

The upside to a down market

No matter what the future brings, investors who buy stock at a lower price get more shares for the same number of dollars invested than those who buy at high prices. The market’s recent doldrums mean that several companies are starting to sport attractive valuations based on reasonable prospects.

That’s the upside of a down market. It means companies can be worthwhile investments even at modest growth rates. As a result, even with iPhone 14 sales coming in softer than expected, there’s a price where Apple’s stock may very well be worth owning.

At the time of publication, Chuck Saletta did not own shares of Apple

Sources –EasyResearch, Yahoo Finance, 9to5Mac, Imore, Apple