Apple (NASDAQ:AAPL) shares are down by 5% this week. The decline is due to news that China has instructed central government officials not to use their iPhones for work or bring them to the office.
China is an important market for Apple, accounting for around 19% of its sales and a lot of its manufacturing. But is the stock market sell-off an overreaction, or should investors be concerned?
What are the risks?
By itself, the latest news from China probably isn’t a big deal. The ban doesn’t preclude government officials from owning iPhones and only affects a small part of Apple’s 1.46bn user base.
The real issues only emerge if the situation escalates in one of two main ways. The first is if the ban on iPhone usage is extended and the second is if the company’s manufacturing base is disrupted.
Neither of these possibilities makes me overly concerned about my investment in Apple shares. But both are issues that investors should think seriously about, in my view.
A broader ban on iPhone usage in China would be a big problem. The latest news announcement is some way from this, though, so I don’t see this as especially likely.
With the US and China in conflict over semiconductors, I wouldn’t rule out manufacturing disruption. But Apple has been working to diversify its production base, possibly in an effort to limit the effect of this.
I think investors would be unwise to dismiss the risks here entirely. But I don’t see anything that provides a compelling reason to sell my Apple shares, either.
A buying opportunity?
Given this, the next question is whether a 5% drop in the company’s share price constitutes a buying opportunity. If the stock market is overreacting to the latest news, should I look to add to my investment?
To my mind, Apple shares aren’t obviously cheap at the moment. The stock trades at a price-to-earnings (P/E) multiple of 29 based on last year’s earnings, which is well above the average for the broader market.
Despite this, earnings growth has been more steady than spectacular. Over the last five years, Apple’s revenues have grown by around 8% per year.
Earnings per share have been boosted by expanding margins and a share buyback programme (which Warren Buffett is a vocal supporter of). But it’s difficult to see how this can continue indefinitely.
Over the last 12 months, the stock is up around 15%. But the company’s earnings per share have been much more static.
As a result, I find it hard to see the stock as a bargain at today’s prices. Even with the drop in the share price this week, the stock looked like better value a year ago.
At today’s prices, I think Apple shares are okay from an investment perspective. I’m not going to sell my stake any time soon, but it isn’t at the top of my list of stocks to buy right now.