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In what is becoming a recurring event, shares of Apple (NASDAQ: AAPL) fell 4% when the market opened on Wednesday, even though Apple earnings beat quarterly earnings estimates with ease. Investors were spooked by CEO Tim Cook’s lackluster outlook for the current quarter, along with his relatively pessimistic comments about the Chinese market.
Apple stock has been on a persistent downtrend since the high of $134 per share seen last year. While it’s easy to succumb to the panic in light of a declining stock price and disappointing quarterly earnings estimates, long-term investors should view this selloff as nothing more than a great buying opportunity.
Apple Earnings Top Estimates
In the Apple earnings report, the company said it earned $3.28 per share in its fiscal first quarter on $75.87 billion of revenue. Earnings per share beat analyst expectations by $0.05, while revenue missed estimates by $720 million. On a year-over-year basis, revenue increased 2%. The results would have been even better if not for the strengthening U.S. dollar—constant currency revenue increased 8%.
Apple sold 74.8 million iPhones in the first quarter, up fractionally year over year. Revenue from the iPhone increased just 1%, which is causing investors to worry, since the iPhone itself represents 68% of Apple’s total revenue. The company recorded the lowest growth in iPhone sales since it was first introduced in 2007.
Sales of other products disappointed as well. Revenue from iPads fell 21% year over year, while Mac revenue fell 3%. The only bright spots were Apple’s Services business, which includes iTunes, the App Store, Apple Pay, and Apple Music. That segment grew revenue by 26%. Separately, revenue from Apple’s ‘other’ category, which includes the Apple Watch, iPod, Beats, and the Apple TV, was up 62%.
Apple’s iPhone sales for the quarter were boosted by higher prices. Average selling prices for the iPhone rose to $691, from $670 in the previous quarter. Average selling prices increased for the iPad and Mac as well.
Among Apple’s core geographic markets, China once again led the way with 14% year-over-year revenue growth. China was Apple’s fastest-growing geography yet again. It handily surpassed the Americas, where revenue declined 4%.
But investors are worried about comments from CEO Tim Cook on Apple’s China market. Cook said Apple is indeed seeing signs of softness there. Since China is now Apple’s second-largest market by revenue, as it recently passed Europe, this is a concern.
More concerning for investors is that Apple forecasts $50 billion to $53 billion of revenue in the current quarter. That would represent an 8% to 13% year-over-year decline. This is rare territory for Apple. If its forecast proves accurate, this quarter would be the first revenue decline in 13 years.
Don’t Panic Over Apple Earnings
Short-term investors may sell Apple stock today due to the company’s disappointing outlook. But long-term investors need to remember Apple’s biggest periods of growth come when new iPhones are released. Apple is currently in a lull between new iPhone releases.
While Apple’s revenue and earnings growth rates look unimpressive on the surface, Apple faced an extremely tough comparison period. Last year’s blockbuster results were fueled by the new iPhone model.
Going forward, Apple has a host of new products set for release – including a new iPhone, likely to be announced later this year. Longer-term, Apple is rumored to be preparing entry into television sets, or possibly even automobiles in some way. Apple also says it will expand its Apple Pay service to China early in 2016.
Apple is incredibly cheap, trading at just nine times earnings. Plus, Apple has a tremendous balance sheet. It ended the quarter with $215 billion in cash, short-term investments and long-term investments. Apple pays a 2.1% dividend, and the company is very likely to raise its dividend and increase its stock buyback plan in April when it updates its capital return program.
Selling Apple now makes little sense. If anything, investors should use the sell-off as a great opportunity to add to their positions at even better prices.
DISCLOSURE: Bob Ciura personally owns shares of Apple (NASDAQ: AAPL).
The Ghost of Steve Jobs
Before he died, Steve Jobs gave an interview to the New York Times where he revealed his desire for Apple to create something unlike anything the world had ever seen. Though Jobs is no longer around, his dream for this technology is alive and kicking. According to global consulting firm KPMG, this technology “could provide solutions to some of our most intractable social problems.” And Morgan Stanley believes it could save the American economy $1.3 trillion each year.