Apple (NASDAQ:AAPL) stock has been hit hard by a slowdown in iPhone sales. This makes some sense, as the Apple iPhone represents nearly 60% of Apple revenue. This has also made AAPL stock super cheap: You were paying just 2.6 times sales to own Apple on Jan. 8, and 12.4 times earnings.
That’s not even counting the cash hoard, estimated at $237 billion in November.
The reason for the market’s fear is that investors don’t see a new catalyst for Apple’s growth. If smartphones are a commodity, and China can make a high-end phone its consumers love for less, where is the growth going to come from?
The answer for AAPL stock is medicine.
Apple Stock and the Medical Market
While analysts are squirreled away in San Francisco’s Westin St. Francis Hotel, watching the JPMorgan Chase (NYSE:JPM) Healthcare Conference, oohing and aahing over the latest drugs, Apple is quietly turning its Watch into a next-generation medical device.
Chronic conditions like diabetes, arthritis and heart disease were a $1.1 trillion market, just in the U.S., just in 2016. Those numbers are rising as people age worldwide.
Much of that money is wasted on people forgetting to take their medicines or monitor things like blood pressure and blood sugar levels. AAPL wants to change that through Food and Drug Administration (FDA) approval of medical features on the Watch, like a heart monitor and a system for detecting falls.
That Life Alert bracelet your grandma uses can cost up to $90 per month to monitor. The Apple Watch 4 costs $400. Which do you think she would prefer this Mother’s Day?
The big breakthrough for the Watch would be in diabetes care. A third-party product, OneDrop, now integrates its glucose monitoring platform with the Apple Watch.
The benefits are not theoretical. Jason Perlow, a former colleague of mine at ZDNet, wrote in September that the Apple Watch saved his life. Early detection probably prevented a stroke. A Florida teen learned of a chronic kidney condition from the Watch’s heart beat detection function.
A Medical Ecosystem
In 2019, anecdotes are going to become data, and pressure is going to grow for people who have chronic conditions, or might have them, to monitor themselves more closely. Eventually this pressure is going to come from the medical community.
Apple rivals from Alphabet (NASDAQ:GOOGL) to Fitbit (NYSE:FIT) are working toward making their wearables into medical devices, but Apple is years ahead, at least in terms of getting approval from federal regulators.
Apple doesn’t yet break out the Watch in its financials. It’s part of the company’s “other products” group, which includes Apple TV, the Beats headphones and other products. But sales within that group were up 31% year-over-year in the third quarter and came to 6% of revenue.
The Apple Watch became the dominant fitness band in the U.S. market during 2018, with IDC estimating 4.2 million were shipped in the September quarter alone, up from 2.7 million a year earlier.
The Bottom Line on AAPL Stock
Compared with the iPhone, the Apple Watch is still a niche product.
But Apple Watch sales are growing, they are due to explode, and this will add enormously to the Apple ecosystem, maintaining and possibly even expanding the iPhone market share. Services tied to the AppleWatch should also start contributing to earnings as we enter the 2020s.
Right now, you can buy all this potential for practically nothing. So long as Apple stock remains down over the high-end iPhone, at under 15 times earnings, you’re getting the Watch business free.
For an investor with a three to five-year time horizon, bargains like this should be irresistible.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AAPL.