The past couple of days have been rotten for Apple (AAPL 0.17%). The stock was punished after reports indicated the Chinese government ordered some agencies not to use iPhones at work (or even bring them to the office), according to a report that first appeared in The Wall Street Journal.
The suggestion that Apple had fallen out of favor in China, one of its biggest markets, immediately threw cold water on the stock, which had rallied 46% so far this year heading into this week. In the roughly 36 hours since the report was published, Apple stock fell as much as 8%, wiping $230 million from the iPhone maker’s market cap.
Some traders are acting as if the sky is falling, but veteran investors will recognize this as a buying opportunity. Here’s why.
Image source: Apple.
The devil’s in the details
Some investors take a “sell first and ask questions later” approach to investing without ever digging into the details of the event that sparked their decision. That does them a grave disservice but represents a buying opportunity for others.
While the report focused on Apple, it clearly mentioned “iPhones and other foreign-branded devices,” so this isn’t limited to Apple. In recent months, the Chinese government has embarked on a campaign to reduce its dependence on technology developed in foreign countries while simultaneously increasing its focus on cybersecurity.
It’s important to note that these restrictions have existed for a number of years but haven’t been strictly enforced. Beijing’s recent proclamation merely brought these existing measures back into focus.
It’s easy to see how investors might be spooked by the prospect of a partial sales moratorium in China. After all, the country represented roughly 20% of Apple’s revenue so far this fiscal year — with the iPhone accounting for the lion’s share of those sales. However, a look at a similar move by China in the past should put those fears to rest.
This isn’t an isolated incident
This isn’t the first time the country placed restrictions on the use of foreign products. Back in 2021, the Chinese government restricted the use of Tesla (TSLA 9.14%) cars for members of its military or by government-owned companies. China cited national security concerns at the time, suggesting that data the vehicles gathered could be leaked or obtained by rival governments.
Despite the moratorium, Tesla continues to be a big seller in China. Earlier this month, information from the China Passenger Car Association revealed that Tesla delivered 84,159 electric vehicles that were built in the country during August, up more than 9% year over year and up 31% sequentially, though Tesla’s manufacturing facility in Shanghai was shuttered for part of July for scheduled maintenance. So far this year, Tesla has sold nearly 625,000 vehicles in China, a 56% increase.
The data suggests that just because the Chinese government restricts some employees from using certain products on the job, that doesn’t diminish their popularity among everyday consumers.
A compelling opportunity
Apple has pulled back nearly 10% from its recent high, making the stock look much more attractive. It’s currently trading for roughly 30 times earnings, and while that’s slightly more expensive than the price-to-earnings (P/E) ratio of 25 for the S&P 500, Apple is deserving of a premium.
Over the past five years, even after enduring the worst downturn in more than a decade, Apple stock gained more than 200%, compared to a 54% rise for the S&P 500.
Furthermore, consumer spending has been pinched by persistent high inflation, and many Apple fans have put off upgrading their existing device. That could be about to change, as inflation has been easing in recent months.
Wedbush analyst Dan Ives estimates that roughly 25% of Apple’s installed base of 1.2 billion iPhones haven’t been upgraded over the past four years. This pent-up demand could drive a “mini-super cycle,” when Apple releases the next generation of its iconic device later this month, according to the analyst.
Ives also suggests that China’s restriction represents less than 500,000 iPhones, compared with the 45 million he expects will be sold in the country over the coming 12 months. It seems some investors might be making a mountain out of a molehill.
Add to that the company’s industry-leading position, robust prospects, and attractive valuation, and it appears that now is the time to buy Apple stock before investors come to their senses.