Mega-tech stocks dominate the performance of the Nasdaq and IT indexes, with Apple (NASDAQ:AAPL) responsible for 13.13% of the Nasdaq 100 weighting.
Apple is one of the most well-regarded information technology companies and a household name that derives more than 50% of its revenues from the iPhone as of 2022 Q2. Hitting a $3T market cap milestone earlier this year, Apple has had a rocky road, like many other tech companies in the current volatile environment.
Focused on the design, manufacturing, and marketing of smartphones, personal computers, tablets, and various related services and products, Apple is an iconic hardware and software-as-a-service (SaaS) company. Apple’s transition to 5G wireless networks and phones propelled its fiscal 2021 sales to a 39% year-over-year increase. The company’s 52-week share price reached a high of $182.94 in 2022, only to fall, along with the broader market and tech. Negative investor sentiment surrounding inflation, overall monetary policy, and geopolitical concerns are sweeping the globe, and Apple’s stock price is down 16% YTD. The current financial environment creates uncertainty on whether now is an optimal time to pick up shares.
- Market Capitalization: $2.48T
- Quant Rating: Hold
- Quant Sector Ranking (as of 7/26): 125 out of 632
- Quant Industry Ranking (as of 7/26): 8 out of 31
There are solid reasons why Apple is a buy for many investors given their cash on hand and the ability to weather the present economic storm and continue to be a solid investment over the long run. However, we currently have a HOLD rating given the number of macro headwinds the company faces, including slowing consumer demand in the U.S. and China. For the first time ever, Apple offered a rare retail promotion in China, discounting the iPhone and accessories. Demand is clearly an issue. However, because of Apple’s balance sheet strength and amazing profitability, they are likely to withstand a slowdown. Despite solid fundamentals, with earnings approaching and the macro environment, Apple is facing some headwinds.
And although Apple was able to take advantage of the demand throughout the pandemic, its Q4 earnings resulted in revenue of $83.36B, missing analysts’ estimates by $1.62B and earnings falling short by $0.01. This has prompted analysts to waver on forward estimates, with 21 analysts revising down within the last 90 days.
Apple Stock Valuation and Momentum
The IT sector is very concentrated in a few stocks that have stretched valuations. Apple stock is one of them and comes at quite a premium. Our overall valuation grade scores it an F, with Apple currently trading at a forward P/E ratio of 24.93x, which is a 16.5% difference to the sector. On a forward PEG ratio basis, an important metric that blends both value and growth, Apple also is expensive compared to the sector, 52.23% higher than peers.
With continued supply chain shortages and the Fed determined to curb inflation with rate hikes, these headwinds are potential dampeners for revenue and EPS growth forecasts. Despite its success with subscribers and its Services setting an all-time record for Q2 on the strength of subscription growth:
“China’s headwinds will likely hit very hard. We believe that the market has already been pricing in the impact of Apple’s Q3 headwinds. However, given the recent updates by Apple’s top assemblers, the market could potentially be pricing in headwinds near the top end of its $4B-$8B range. Notably, Apple’s iPhone and Mac accounted for 62.7% of its FQ2 revenue. Furthermore, Mac has been instrumental for Apple, with a 14.6% growth in FQ2. Hence, a weak showing by its Mac and iPhone segments could significantly affect the extent of its headwinds.” –JR Research.
Apple Stock Growth and Profitability
With the likes of tech behemoths like Microsoft (MSFT) posting their slowest sales growth since 2020, given the strong U.S. dollar and weakening demand, you can anticipate similar results from Apple. A strong dollar negatively impacts revenue streams from foreign sales, a macroeconomic headwind that investors should also consider. Not all quant grades are rated equally, which is why I rate Apple a Hold.
I wrote a previous Apple Q&A article to discuss how the company demonstrates strong historical and near-term average growth. Yet, analysts expect long-term future growth to be below its sector. This weighs heavily on Seeking Alpha’s overall Growth Grade and overshadows most of Apple’s other underlying growth metrics. earnings per share is a great way to gauge potential winning stocks, and although Apple’s most recent EPS of $1.52 beat by $0.09, Apple’s forward long-term EPS growth has a grade of C- at 11.81%, 21.30% below the sector. EPS calculates a company’s profit and divides it by the outstanding shares of common stock to indicate profitability. The higher the EPS, typically the higher the value of the company. Because EPS also is used as a big component when calculating the P/E valuation ratio, Apple’s valuation indicates that the stock comes at a much higher price than some investors are willing to pay.
iPhone revenue grew 5% year-over-year, and Apple’s operating cash flow of $28.2B set March quarter records. Despite a challenging environment, Apple generated over $220B in revenue. And while Apple’s stellar A+ profitability remains an attractive factor when investing in this stock, the company’s gross margin of 43.7% was down ten basis points from Q1.
“A seasonal loss of leverage and unfavorable foreign exchange were partially offset by a favorable mix. Products gross margin was 36.4%, down 200 basis points sequentially, mainly driven by seasonal loss of leverage and FX. Services gross margin was 72.6%, up 20 basis points sequentially due to a different mix,” said Apple CFO Luca Maestri.
As you can see from the $116.43B cash on hand, Apple is likely to withstand a slowdown and recession concerns. And while upside potential may be muted given future headwinds, analysts forecast little revenue growth over the next few years.
Unless you currently own shares of Apple, I do not believe the current risk/reward scenario is worthwhile given the economic downturn and concerns with demand in China and globally, especially as other IT stocks can offer better growth and valuation frameworks.
Hold the Apple
Given the current environment, headwinds, and slowdown in demand, Apple is rated a Hold. Although tech stocks can be great buys, especially those with more attractive valuation frameworks and strong fundamentals, Apple’s future outlook on an apples-to-apples basis with other technology stocks is uninspiring.