Tech giant Apple (AAPL -0.74%) will report results for its fiscal fourth quarter on Nov. 3. Ahead of the report, many investors are likely wondering whether or not the tech stock is a buy. After all, shares have pulled back recently.
Specifically, the stock is down 9% since Aug. 1. So is the stock a buy, now that shares are trading at a discount to where they were this summer?
A review of Apple’s underlying business, its growth opportunities, and the stock’s valuation show that the stock does, indeed, look like a compelling buy today. Here’s why investors may want to add shares of the iPhone maker to their portfolios.
A healthy business
One aspect of Apple stock that may often be overlooked is just how strong the company’s financials are. Sure, a market capitalization of nearly $2.8 trillion may seem ridiculous to people unfamiliar with the company’s underlying financials. But consider that Apple’s business, which boasts a loyal and growing customer base with over 2 billion active devices, throws off more than $100 billion of free cash flow annually.
Then there’s the company’s extraordinary balance sheet. Apple wrapped up its most recent quarter with $166 billion in cash and marketable securities. Net of its debt, it boasted $57 billion of cash.
With a balance sheet and cash flow like this, Apple can return cash to shareholders (both directly and indirectly) in huge sums. Indeed, Apple paid out more than $24 billion in combined dividends and share repurchases in its most recent quarter alone.
Catalysts
Some investors may be concerned about Apple’s recent growth profile. Its revenue fell 1% year over year in fiscal Q3. To be fair, the company faced a foreign-exchange headwind that negatively impacted its revenue growth rate by about 4 percentage points. Still, even when revenue growth is adjusted for this figure, it’s still anemic.
Fortunately, a few areas could help Apple’s top-line growth accelerate. While investors can’t rule out a possible reacceleration in Apple’s core iPhone business, the company may not need meaningfully better performance from the iPhone to do well.
One area for Apple that consistently grows at robust rates is its services segment, where the company records revenue from services like AppleCare, app store transactions and subscriptions, Apple Pay, and Apple TV+. This business grew 8% year over year in fiscal Q3. Of course, growth would have been better if it weren’t for that foreign-exchange headwind.
Then there are emerging markets. Apple said in its fiscal third-quarter earnings call that it saw record revenue in emerging markets. For instance, revenue in India during fiscal Q3 grew at a rate that was a “strong” double-digit number, Apple CEO Tim Cook said.
As services and emerging markets grow as a percentage of total revenue, they could help Apple’s revenue reaccelerate.
A reasonable valuation
Considering Apple’s healthy balance sheet, strong cash flow, and robust growth in services and emerging markets, the stock’s current valuation of less than 30x earnings is a reasonable price to pay for shares. Sure, the stock isn’t a bargain at this level. But it’s cheap enough to likely reward investors who buy today and hold for the long haul.
As a bonus, those investors will receive a dividend that will likely grow over the years, too. The company has plenty of cash to go around and has a long history of being a good steward of shareholder capital.
Apple will report its fiscal fourth-quarter results after market close on Thursday, Nov. 2.
Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
