The Motley Fool: Sagging iPhone sales should not discourage Apple buyers

Shares of Apple (Nasdaq: AAPL) have lost value over the past year, in part due to worries about slowing iPhone sales. That’s significant, since the iPhone generated 63 percent of total revenue in the company’s last quarter.
Even if Apple’s growth slows, though, it’s well positioned for continued profitability. There will be demand for new models of the phone, as well as for new offerings – remember how good Apple is at inventing entire new product categories. In the meantime, thanks to its fanatically loyal customer base, the company is collecting many billions from its iPad, Mac computers and iTunes and other services.
But wait – there’s more: Relatively new and upcoming products include the Apple Watch, Apple Pay and even a possible Apple Car. It has many opportunities in gaming, health care, home automation and elsewhere. Apple’s annual revenue recently topped $233 billion, with net profit margins above 22 percent and free cash flow of nearly $70 billion.
Apple’s stock valuation is rather compelling, with its price-to-earnings (P/E) ratio around 11, a significant discount to its five-year average of 14. It offers patient believers a dividend, too, which recently yielded 2 percent. Better still, there’s a lot of room for further dividend growth - and management has been rewarding shareholders via share buybacks, too. (The Motley Fool has recommended and owns shares of Apple.)
Ask the Fool
Q: What is a company’s “market cap”? - C.J., Worcester, Massachusetts
A: It’s sort of a price tag. A company’s market capitalization is the current value placed on it by investors in the stock market. Calculating it is simple. Just take the current stock price and multiply it by the number of shares outstanding. (Many online stock-quote providers list shares outstanding - and often the market cap, too.)
Imagine that the Free Range Onion Co. (Ticker: BULBZ) has 40 million shares outstanding and a stock price near $20 per share. Multiply 40 million by $20, and you’ll get a market cap of $800 million. That’s the current market value of the Free Range Onion Co. If you wanted to buy the whole company, you’d probably have to pay around $800 million - or more. Acquisitions often happen above market prices, sometimes due to a company’s debt obligations or in order to avoid a bidding war.
It can be helpful to check out the market cap of a company you’re interested in. For example, if you’re thinking of investing in social media specialist Twitter, note that its market cap was recently near $14 billion, much more than Whole Foods Market, Alcoa, Best Buy, Xerox or JetBlue Airways. Does Twitter’s value seem reasonable in comparison? It all depends on your assessment of its profit-generating potential.
Q: Is it bad news if my mutual fund closes to new investors? - D.Y., Knoxville, Tennessee
A: Not at all. Funds sometimes reject new investors’ money when their managers have more dollars to invest than great investments to park them in. When a fund grows really big, it becomes harder for managers to earn high returns because they have to spread out the money more.
My dumbest investment
My dumbest investment was in a company that seemed to have an appealing alternative to fracking for oil, one that reportedly would revitalize wells that drillers had given up on. I bought in around $1.24 per share, and now have an 89 percent loss. Perhaps the stock will rebound when the sand used in fracking gets expensive or too costly to transport. - T.E.S., Gardnerville, Nevada
The Fool responds: You received a lot of lessons for your money. First off, you invested in a classic “penny stock” - one trading for less than about $5 per share. Penny stocks tend to belong to companies that are new and/or unproven, and they are extra-risky. Their small size makes them easy targets for those who want to manipulate them, hyping them to attract new (and naive) investors who will boost the share price as they buy, so that the hypesters can sell their own shares at a profit. (This is how a “pump and dump” scheme works.)
Since you wrote to us, the company’s stock price has fallen pretty much to zero, completely wiping out many investors in it. It can be hard to imagine that stocks that have plunged severely can still plunge more, but they can - and often do. A supposedly safer alternative to fracking may sound enticing, but don’t invest before checking on a company’s financial health and profitability.