Apple(AAPL)

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While Apple Inc. (NASDAQ: AAPL) is the world's largest company by market capitalization, it has not been able to avoid the global equity selloff in 2016. The company's stock closed at $94.02 per share on Feb. 5, 2016, which is near the lower end of its $92 to $134.54 per share 52-week range. The company's quarterly earnings report for the fiscal period ending on Dec. 26, 2015 indicated that its iPhone sales rose under 1% compared to last year's rate, the product's slowest year-over-year sales growth. Apple's current valuation ratios are extremely attractive, thanks to its price slump. It also has steady, attractive profitability ratios.

Apple's price-to-earnings (P/E) ratio is 10.01, which is lower than the 10.5 average for the consumer electronics industry, as well as that of the S&P 500 Index. Apple's P/E ratio experienced an 11.4 low and a 43.5 high over the past 10 years. Since its trailing 12-month P/E ratio is well below its 10-year average of 20.46, its stock is worth consideration as a small portion of a well-diversified portfolio. Additionally, the company is rumoured to release the coveted iPhone 7 in late 2016, which will almost surely increase the company's revenue.

Apple has raised its annual dividend for three consecutive years. It has also maintained a dividend pay-out ratio below 30%, which indicates the company could raise its dividend. Its trailing 12-month dividend pay-out ratio is 21.6%, as of Feb. 5, 2015, which is extremely attractive since it has $21.12 billion in cash and cash equivalents, based on its most recent annual report. The company's dividend yield is in line with the industry's average at 2.16%. Apple's earnings are poised to rise with the new iPhone's release, which will likely cause the board to raise its annual dividend per share for the 2017 fiscal year.

Apple's return on equity (ROE) is near the upper end of its 10-year range, which makes the stock very attractive. The company increased its net income from $39.51 billion during the 2014 fiscal year to $53.39 billion during the 2015 fiscal year. Its shareholders' equity only increased from $111.55 billion to $119.36 billion over the same period.

Apple had a 33.61% ROE for the fiscal period ending in September 2014, which is down from 46.25% during the 2015 fiscal year, though that was its 10-year high point. The technology giant is poised to generate even more net income with the potential increases in demand for the iPhone in 2016.

As of 2016, the best-selling technological product in the United States is the iPhone 6 from Apple Inc. (NASDAQ:AAPL). This small handheld device has a large impact on culture as well as the economy.

Impact on Apple's Bottom Line

Apple reported a record $51.1 billion in revenue and $11.1 billion in profit during its fourth fiscal quarter of 2015, which equates to $1.96 in profit per diluted share. The company significantly outpaced its 2014 fourth quarter numbers, which were $42.1 billion in revenue, $8.5 billion in profit and $1.42 in profit per diluted share. Fiscal year 2015 was the most successful in Apple's history, and those figures don't include the 2015 holiday sales for the highly anticipated iPhone 6S or iPhone 6S Plus.

Break down the balance sheet into net sales, and total iPhone sales account for a whopping 63% of all Apple revenue. Apple is one of the most valuable companies in the history of the world, yet nearly two-thirds of its revenue is dependent on one product line. IPhone sales are historically resilient, partially because Apple makes it difficult for customers to adapt to alternative operating systems.

IPhone Component Pricing: What It Costs to Build

Apple's sourcing model is one of the reasons it generates astronomical profit margins. The company makes very little of its own products. Instead, components and materials are gathered from around the globe and sometimes even from direct competitors, such as Samsung. This significantly lowers capital expenses for Apple, saves the consumer a bit of money and lets shareholders benefit from the difference.

Apple displays come from Japan, the Touch ID sensor is made in Taiwan, and an accelerometer comes from Germany. All told, there are more than 200 suppliers of individual software or parts around the globe.

According to disclosures filed with the U.S. Securities and Exchange Commission (SEC), the typical iPhone model sells at an average price of $603, and a 64 GB iPhone 6 Plus goes for around $749. Estimates put the phone's building cost at around $200 to $240, not including marketing costs, research and so on. According to Tech Insights Quick Turn product estimates, the new A8 processor and Qualcomm modem cost about $60. The 5.5-inch touch screen is another $51. Depending on the model, the non-electric components are between $10 and $18. Cameras run for $16, and the battery is approximately $5.50. Power management and audio devices only add around $7. Connectivity features are about $13, and supporting materials cost another $5. Assembly and testing adds $11, while a broad category called "other" makes up $34.50. SDRAM and NAND features add about $14.

Economics of IPhone Carriers

Of course, most iPhone 6 buyers aren't paying the $600 to $750 price tag. Instead, they utilize carrier-subsidized deals from companies such as Verizon and Sprint. The lowest-cost plans, as of January 2016, were around $50 for basic use-and-return policies, though most are considerably higher in the $200 to $400 range. Customers can choose Apple's upgrade program if they want to avoid contracts with a specific carrier.

Offers from Sprint and T-Mobile in early 2016 ranged $20 to $22 per month for plans. AT&T used installment plans at $37.45 per month, or $199 for a contract-subsidized price. Depending on the model, Verizon iPhone 6 packages could go as high as $35 per month, or $499 for a two-year plan.

IPhones and Economic Growth

Around the start of 2015, it was reported that Apple's iPhone 6 sales were responsible for 10% of all U.S. economic growth. Several major outlets reported this in one form or another, including Forbes and the New York Times.

The claim featured a 1.9 to 2.5% growth rate for the U.S. economy between 2014 and the first quarter of 2015. Based on pure mathematical estimates of the productive value of all final American products, as well as the revenue generated from iPhone 6 sales, the Apple device was seemingly responsible for 0.25% or 0.3% of the change in the United States' GDP. On the surface, this meant iPhone 6 sales were 10 to 15% of conventional economic growth.

GDP is actually a very rough, overly simplistic and problematic estimate of growth. Moreover, revenue from iPhone sales isn't the same as domestic product from iPhone sales, since domestic product tries to capture value added, not just incoming dollars. Even if the statistic is wrong (it probably is), it is still an interesting way to express how huge Apple sales numbers were.

Analysts have mostly been bullish about Apple as a growth stock in recent years. Their opinion, at least for this quarter, is no different. For example, some analysts expect the company to report $78.61 billion in revenues and an EPS of $3.06, while professional analysts expect the company to earn $76.48 billion in revenues and an EPS of $3.43.

There are two factors that will weigh heavily on the company's earnings this quarter and in the future: The first one is China, an especially important for Apple's growth as it constitutes an ever-increasing share of the company's profits. The country accounted for approximately 25 percent of total sales in last year's record January quarter. “If China falls, so does Apple,” said Daniel Ives, analyst at FBR Capital Markets. “They've really bet the house on the China growth opportunity.”

Then, there is Apple's reliance on the iPhone. The device accounted for approximately 63 percent of its total sales last quarter. Flagging sales prospects for the device this year have revealed a gaping hole in the company's revenue stream. Put simply, no other product in the company's portfolio comes close to replicating the consumer experience, market share or margins for the device. “Apple has become a victim of their own success as the blockbuster iPhone 6 product cycle was hard to replicate as many customers are either buying an older, cheaper iPhone 6 or waiting for the iPhone 7,” Ives said in an interview with Reuters.

On the other hand, Piper Jaffray analyst Gene Munster considers the stock a buy. “We believe the similarities between the situation in 2013 and today are stark given a relatively disappointing iPhone 6S cycle, the wide expectation for down y/y iPhone units in Mar 16, and the expectation for multiple single digit growth quarters looking forward,” he wrote in a note this morning.

Apple's stock has been riding high for the last couple of years on the back of outsized expectations for the iPhone. The current economic pullback has acted as a corrective of sorts for the company's investors and management. Apple's future performance depends on growth in emerging markets, such as China and India, and also a new product pipeline that resonates with consumers.