To The Moon

Apple's stock, like many others, has had a rough time in 2022. The shares have dropped by 22% since reaching an all-time high of $182 back in early January.

Apple's success has been well-documented. After all, even with this year's slide, its market value is more than $2 trillion. However, companies can't rest on their laurels and grow complacent. As the old saying goes, past success is no guarantee of future results.

Hence, investors must ask tough questions about Apple's future prospects. Has the price drop created a value opportunity? Or could investors find better investments at this time?

Image source: Getty Images.

Resuming sales growth

Apple's fiscal third-quarter results, covering the period that ended on June 25, showed weaker sales growth, to which shareholders have become accustomed. During the quarter, sales increased by 1.8% to about $83 billion. Apple's iPhone sales, representing roughly 50% of the top line, grew by only 2.8% to $40.7 billion.

Fast forward, and the company's fourth-quarter sales, which ended Sept. 24, rose by 8.1% to $90.1 billion. Importantly, iPhone sales were up by 9.7% to $42.6 billion. The company released a new version in September, meaning it was only selling for a few days during the quarter. However, in a tough smartphone market, CEO Tim Cook stated that the iPhone grew its market share.

Based on the number of units sold, Counterpoint Research estimates that the iPhone has more than a 50% market share in the U.S. In the premium space, the iPhone accounts for 57% of the worldwide market.

While iPhone sales are important to Apple's results, it has other products and services, too, of course. Notably, services such as technical product support, the App Store, and advertising have continued growing. In the fourth quarter, service revenue increased by 5% to $19.2 billion.

In short, the company continues offering highly desired products and services. Even in an economic downturn, I would expect the company to continue taking market share, leading to an even better competitive position when things get better.

Returning cash

Apple's business also generates a lot of free cash flow (FCF). In the latest fiscal year, its FCF was $114.4 billion versus $93 billion a year ago. Fortunately, the company doesn't just hoard this cash but returns some of this to shareholders via dividends and buybacks.

The board of directors has a history of raising dividends, including by a penny last May to $0.23 a quarter. Apple's stock has a 0.7% dividend yield.

While others have higher dividend yields, you shouldn't feel dismayed. Apple also rewards shareholders by repurchasing shares. Last year, it spent about $90 billion on buybacks. Historically, this has been a good use of shareholders' money, too.

Valuation

With solid long-term prospects and a company that's willing to return cash, it's time to check on Apple's valuation. After all, everyone wants to pay a fair price.

The stock currently sells at a price-to-earnings ratio (P/E) of over 23. Although down from over 40 at the start of the year, the shares are more expensive than in past years. Therefore, while Apple's stock may not offer a bargain, it's not as widely overvalued as it was at the start of the year, either. It's still more expensive than the S&P 500, which has a 20.5 P/E, but Apple has historically outperformed the overall market, and I believe the premium is warranted.

After weighing all the factors, the company's prospects make this a compelling opportunity to purchase shares.