Apple, the world’s most valuable company, is grappling with a series of challenges, raising questions about its resilience to economic volatility. The company’s lackluster sales performance in China with its latest iPhone models has ignited concerns over Apple’s ability to justify its premium valuation and avoid a potentially dismal four consecutive quarters of declining revenue – a streak not seen since 2001. These challenges coincide with escalating political tensions with China and concerns about device overheating, compounding the company’s predicament. Adding to the mounting woes, KeyBanc recently joined a string of firms in downgrading Apple’s stock.
James Abate, Chief Investment Officer at Centre Asset Management, underscores the glaring disconnect between Apple’s stagnant growth and its lofty stock prices. Abate points out, “Apple has some of the weakest growth among the megacaps, but the stock hasn’t de-rated to multiples it saw in previous periods when it wasn’t growing.” He emphasizes the importance of investors safeguarding against Apple’s valuation risk through put options, given its “systemic” significance to the stock market.
Despite these challenges, Apple saw a modest rise of 0.6% on Thursday, following four consecutive sessions in the red. However, since the end of July, Apple’s shares have witnessed a significant 10% drop, in stark contrast to the Nasdaq 100 Index, which experienced a comparatively milder decline of 5.6% during the same period. This downturn has resulted in the erasure of over $320 billion in market value. Nonetheless, Apple still holds the position of the largest component of the S&P 500 Index, constituting more than 7.1% of the index’s total weight.
While Apple’s dominance in the market presents a challenge for equity investors to overlook, there are other megacaps with potentially more enticing growth prospects and more reasonable valuation multiples. Abate suggests, “You can make a compelling fundamental case for Amazon as a margin expansion story, for Microsoft and Nvidia as part of the AI craze, or for Alphabet and Meta weathering a slowdown in consumer advertising, but Apple has demonstrated no revenue growth for some time.”
As Apple approaches its fourth-quarter report slated for early November, analysts anticipate a 1% decrease in revenue compared to the same period last year. In contrast, the broader S&P 500 tech sector is expected to see a 1.5% increase in revenue for this quarter, as reported by Bloomberg Intelligence.
In the face of these challenges, Apple’s stock trades at 26.6 times estimated earnings, surpassing the multiple of the Nasdaq 100 Index and its own long-term average. Additionally, it commands a premium in terms of forward sales, while its free-cash-flow yield languishes below 3.7%, compared to its 10-year average of approximately 6.4%.
While a return to positive revenue growth at Apple is anticipated in the 2024 fiscal year, the pace falls far short of levels observed in recent years. Moreover, new product categories, such as the Vision Pro headset, are not anticipated to significantly drive growth in the near future.
Given these challenges, KeyBanc Capital Markets recently downgraded their rating on Apple’s stock, citing concerns about valuation and growth potential. Over the course of this year, a series of downgrades has caused the consensus rating on the stock to drop by 9% from its December peak. Among megacaps, fewer than two-thirds of the analysts tracked by Bloomberg recommend buying, marking the lowest ratio.
Michael Kirkbride, Portfolio Manager at Evercore Wealth Management, acknowledges the hurdles but extends the benefit of the doubt to Apple, given its track record of navigating through turbulent times. He notes, “Apple remains a top brand globally, it has unparalleled supply-chain expertise, and its free cash flow means that the return of capital is historically different than you get at other companies. It’s worth sticking around for that.”
In conclusion, the current economic challenges of Apple underscore the need for strategic adaptation in navigating a rapidly evolving market landscape.
Source: Bloomberg
