Is It Time to Buy the Apple Downgrade Dip?

Stock Market

Apple (NASDAQ:AAPL) got the wind knocked out of its sails last week when KeyBanc Capital Markets analyst Brandon Nispel downgraded AAPL stock from Overweight to Sector Weight, the equivalent of Buy to Hold.

It wasn’t a big deal as Apple finished the week up nearly 4%. However, since hitting a 52-week high of $198.23 at the end of July, it’s lost almost 11% of its value. When you’re a three-trillion company, that’s not a small amount of market cap disappearing. 

The Keybanc analysts had four reasons for caution: valuation, struggling U.S. sales, international sales are also iffy, and analyst estimates for future earnings don’t have much room to go higher. 

Many are wondering if this is a buy-on-the-dip moment. The best moment to buy AAPL stock is whenever you have the cash in the bank and can afford to hold it for 3-5 years.

Here’s how I’d play the Apple downgrade dip.

The Counterargument to the Analyst Arguments

To me, there are only three arguments because the first (valuation) and last (earnings estimates) are two sides of the same coin. 

Keybanc argues that Apple is valued at 26.3 times its 2024 earnings per share, near a record high and higher than its average multiple of 23.5. It also trades at 25x its estimated 2024 free cash flow. On the other side, Keybanc feels its top-line revenue and EPS estimates are as high as they go in the near- to medium-term. 

“You’re paying a premium for a company that’s not really going to grow,” Nispel told Barron’s writer Eric Savitz. 

MarketWatch says the 44 analysts who cover its stock give it a 2024 EPS estimate of $6.55, while 33 analysts, according to Yahoo Finance, have a 2024 revenue estimate of $406.23 billion, 6% higher than 2023.

The other thing to consider is what Apple does with artificial intelligence. At the moment it’s miles behind its peers. However, historically, it has always been late to the party, a move that’s done partly to ensure the products it delivers are what consumers really want. 

A big announcement on the AI front over the next 12 months will help keep valuations higher than historical averages.

U.S. and International Growth Stalling

In June, UBS analyst David Vogt warned that iPhone sales were softening. For example, in May, sell-through on its iPhones was 2% lower than a year earlier. 

However, BGR reported in August that Apple has increased its iPhone production plan for 2023 by 3.2 million units. It plans to produce 85.6 million iPhone 14 units and 86.3 million iPhone 15 models. It plans to build 200,000 fewer iPhone 13 units this year. The increase should result in higher revenues than expected. 

Apple has plans to open 15 new retail stores in Asia through 2027, four new locations in Europe and the Middle East, and four in the U.S. and Canada. It also plans to revamp another 30. 

India and China are a big part of Apple’s international growth. At the moment, Apple has 520 stores worldwide, with approximately 260 in the U.S. Over the past year, the Asia/Pacific region generated $130 billion in revenue or one-third of its total. 

With its first two stores in India opening earlier in 2023, it would be easy to imagine the region accounting for half its sales by the time it completes the 21 new or revamped stores planned for Asia/Pacific by 2027.

There’s a good chance that its U.S. and international growth will turn out better than analysts expect.

The Buy-the-Dip Move

Assuming you have the cash and can afford to hold AAPL stock for 3-5 years, here’s what you might do as the stock faces headwinds. 

First, you buy 100 shares for around $177, where it currently trades.

Secondly, you sell the April 19/2024 $140 put. On Oct. 6, the put had a volume of 3,059, 2.14x  its open interest. The annualized yield on that put is 2.2% over the next 195 days. While that’s not a great yield in this high-rate environment, the whole reason for making this play is to give you a potential opportunity to average down. 

If the Apple share price moves higher over the next 28 weeks, you don’t have the shares put to you, and you pocket the $219 in income. If you buy shares at a net price of $137.81, your average cost for 200 shares would be $157.65, 11.2% lower than its Oct. 6 closing price of $177.49.

One thing to keep in mind with puts is that you don’t have a choice when selling them. If they’re put to you, you must buy at the strike price, even if the shares have dropped to $120. That’s the risk you face with selling puts. 

However, since July 2021, Apple shares have only traded below $140 on two occasions: May to July 2022 and December 2022 to early February 2022.

Buy on the dip with a twist for AAPL stock.  

On the date of publication, Will Ashworth did not have (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 Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.