Why Apple Inc. Is Both a Value and Growth Stock

Apple Inc. (NASDAQ:AAPL) has been on a roller-coaster ride in 2016 as earnings came in mixed. I believe the stock is extremely undervalued given the long-term tailwinds.

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Apple Inc. (NASDAQ:AAPL) has had a rough few years; pundits have been blasting the stock because of decreasing iPhone sales and a lack of innovation of late. While iPhone sales have been weaker lately, I don’t believe that iPhone sales have peaked. There’s no question that the recent iPhone models have reported weaker sales than past models, but I think it’s a temporary weakness in sales and not a trend that will see the iPhone sales fall steadily over the next few years.

While investors worry about projecting iPhone sales, the Foolish investor must take a step back and look at the big picture. The company is planning to sell its products to emerging markets such as India, which will provide a huge boost to the company’s top and bottom line. In addition to this growth catalyst, Apple’s services segment has been a huge generator of free cash flow and could be another big tailwind that propels the stock much higher in 2017.

Apple reported mixed earnings all year, as many hedge funds dumped the stock because they were simply impatient. Apple saw a year-over-year decline in total revenues thanks to iPhone sales falling by about 12%. I believe the general public is overreacting and value investors can get a fantastic entry point if they buy in at a low point, while this stock continues to fluctuate like a roller coaster.

Pundits have been overlooking the services business, which will be a huge driver of Apple’s stock next year. The services segment is up a whopping 22% year over year and now accounts for over 11% of Apple’s overall revenues. The App Store, Apple Music, iTunes, iCloud, and AppleCare have all grown very nicely and have been doing a fantastic job of offsetting the weakness in iPhone sales.

Is Apple a value stock or a growth stock?

The services business is a free cash flow–generating machine and will fuel future dividend raises and stock buybacks. With the stock beaten up to a mere 13.7 price-to-earnings multiple, it does seem like a value stock right now, but is there still the possibility of growth?

I believe the services business will continue to report strong numbers next year, and we could also see the iPhone make a huge turning point over the next two years. The iPhone 8 could be the major redesign that could fuel a ridiculous amount of demand worldwide. This rebound in iPhone sales, when combined with the growing services business, will make Apple skyrocket over the next few years.

Apple is both a growth and a value stock, and now is the time to pick up shares while they’re beaten up. Warren Buffett has never been a big fan of tech stocks, but in the case of Apple, the value is just too good to pass on.

Even considering the poor exchange rate, making the conversion to U.S. dollars to buy Apple stock will still be a huge winning bet over the next few years. Jim Cramer of Mad Money has a $146 price target on the stock, which represents a whopping 30% gain from current levels, not including the 2% dividend yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple.

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