Apple stock has been stable so far this year and lags far behind the rest of Big Tech. After a strong recovery, the stock is now 6% below all-time highs.
The iPhone maker’s poor performance is justified by lackluster growth since 2021, with five of the last six quarters showing declining year-over-year revenue, as well as several quarters of declining net income.
Apple investors have a lot to worry about, including market saturation, regulation, lack of innovation, exposure to China, and the selling of shares by Warren Buffett, one of the company’s largest shareholders and strong supporters…
Despite all that, Apple has been able to generate enough excitement about its upcoming developer conference and overcome these concerns, as reflected by the 13% increase in the last month.
So let’s prepare for this future-defining WWDC, taking place in June, and discuss the right way to position ourselves ahead of the big conference.
Apple’s poor performance is based on fundamentals
I’ve been covering Apple on Seeking Alpha for over a year. My first three articles were dedicated to explaining Apple’s ecosystem, its underrated services business, and its 2024 setup.
The fact that Apple was one of the great investments in history won’t be great news to anyone, but the company has been struggling recently, and so has the stock.
So far this year, Apple is underperforming the market by more than 10%, in a year that has generally been extremely good for the rest of the big tech companies.
In fact, since the end of the 2021 bull market, Apple has been unable to keep up with the market as the company failed to maintain consistent growth post-pandemic.
Before discussing the future, it is important to review all the problems and obstacles that Apple is facing.
The list of problems is long and growing.
I talked extensively about the reasons for Apple’s poor performance in a previous article, but I think it would be beneficial to quickly review them.
It all comes down to Apple’s results and, more specifically, revenue. Since the fiscal first quarter of 2023, Apple’s revenue growth, year-over-year, was as follows: -5.5%, -2.5%, -1.4%, -0.7%, 2.1% and -4.3%. For a company trading at a multiple of twenty, these growth numbers are a problem.
The lack of growth is largely due to a long replacement cycle. Apple still generates the majority of its revenue (over 75%) from hardware. Apple’s hardware quality is a double-edged sword because a 5-year-old iPhone still works fine, as do old Airpods, iPads, etc.
That, combined with a lack of material innovation on Apple’s part, has resulted in the worst replacement cycle in quite some time for the company.
Created and calculated by the author using data from Apple financial reports and earnings calls.
As we can see, product revenue per active device was $135 in 2023, a significant decrease from 2021 and 2022 as each of the company’s product categories saw a decline.
Despite that, analysts, including me, assumed that another rebound in sales is just a matter of time, anticipating an improvement when the macro context improves and the typical 3-year cycle materializes.
However, as 2024 began, investors began to question Apple’s ability to keep up with the rise of generative AI.
Created by the author using data from Apple’s financial reports.
Additionally, a series of bad news coming from China, which was responsible for ~19% of the company’s sales in 2023, raised concerns about Apple’s ability to accelerate growth.
Created and calculated by the author using data from Apple’s financial reports.
The only category that has been atypical is Services, where Apple maintained a compound annual sales rate of 19.6% and a growth rate of between 10 and 10 years during the last three quarters. However, the company is experiencing increased regulatory scrutiny over its App Store fees and policy, especially in the EU, as well as its relationship with Google, which is the largest contributor to services revenue.
This has investors concerned that even the “good part” of the company is starting to show weakness. Not only that, the company had a bad second quarter, where it beat EPS estimates only due to accelerated buybacks, and revenue was slightly above pre-announcement consensus estimates, but much lower than estimates from ago. a few months.
All of these concerns have culminated in Warren Buffett selling shares, which may not be a big deal, but it’s certainly not a positive boost for stocks.
Overcoming Concerns Through GenAI Rumors and Historic Buyback Announcement
Nothing we’ve discussed so far should have resulted in the stock remaining flat so far this year. Not only that, Apple has maintained a historically high multiple for the company, in the mid-twenties.
So what is the explanation? Well, Apple announced a $110 billion buyback last quarter, but in reality, this pace of share buybacks isn’t a big surprise for Apple, which already had warrants of $90 billion and $100 billion, and has had six consecutive years of buybacks of $70 billion or more.
I think almost all of the rally can be attributed to investor enthusiasm ahead of Apple’s WWDC. With so many reports about different types of new GenAI features and management referring to the event as one of the most innovative in the company’s history, it’s reasonable that investors would want to “buy the rumor.”
The question is, will they want to sell the news?
What to expect at the next WWDC
Before we get into the new features of GenAI, a rumored collaboration with OpenAI and Apple’s own AI chips, I think we should look at the bigger picture.
For Apple stock to perform, investors need to see revenue growth. I estimate Apple can trade up to a 30x multiple if it demonstrates a clear path to mid- to high-single-digit revenue growth over the next few years.
What will that path be like? Well, it will mostly depend on a solid iPhone launch. The last strong iPhone was the iPhone 12, released in November 2020. In FY21, Apple had iPhone sales of $192 billion, and pandemic-driven sales continued into FY22 when the company had iPhone sales of $205 billion.
Created and calculated by the author using data from Apple’s financial reports.
Being more than three years away from the last solid launch positions Apple well ahead of the iPhone 16, and that’s even without GenAI’s contribution.
So, a possible partnership with OpenAI, an improved Siri, and other interesting AI features in photo editing, writing, music, and more should be more than enough to create a solid iPhone 16 cycle.
That said, several questions need to be asked.
First, is this a more popular topic in the financial community, while most Apple customers don’t need to upgrade their phones?
Second, how much of this would be structural growth? Or is the new reality for Apple shareholders, a strong iPhone cycle once every three or four years and mediocre growth in between, resulting, at best, in average market growth over the long time?
Valuation and short-term investment strategy
Apple’s fiscal year is not aligned with the calendar year. I will use calendar year numbers for a more convenient comparative analysis.
Based on current consensus estimates, Apple’s ’24 EPS is expected to be $6.70, up 3.7% year-over-year and reflecting a multiple of 28x. At calendar 25, EPS estimates stand at $7.39, reflecting 10.5% growth and a P/E of 25x. Revenue growth should be 1.5% and 6.2%, respectively.
In my opinion, Apple’s valuation range is 23x-30x, considering the current P/E of the S&P 500 is 20.7x. The low end reflects low single-digit growth (1%-3%), and the high end reflects high single-digit growth (7%-9%).
Over the next decade, I think the most reasonable expectation is for Apple to be in the middle, growing 4% to 6%. As such, I estimate that a fair multiple for Apple will be in the 26x-28x range.
There is a lot of excitement about GenAI right now, which is enough to overcome the revenue decline and maintain a 28x multiple. However, this will not hold up over time and I expect anything less than a very exciting WWDC to result in a decline.
When I look ahead to Apple’s next fiscal year, we can see that shares are only slightly below our fair multiple range.
So here is the final result. As I wrote in my previous article, I found the risk/reward favorable ahead of WWDC when Apple was trading in the range of 25 times 2024 earnings.
At current levels, Apple is on hold. Only in the case of a perfectly executed conference and very interesting announcements, the stock will not experience a new sell-off. Investors will then refocus on the company’s actual results, which are not expected to be good in the near term.
In my opinion, Apple seemed very excited about not-so-exciting announcements in the past (look no further than the recent iPad day), and I think there’s a chance this WWDC could be a disappointment, especially as key aspects like the OpenAI partnership It won’t have enough time to come to fruition.
Conclusion
The WWDC that will define the future of Apple will take place in less than a month and investors are very excited.
This enthusiasm is reflected in the stock price, as Apple now trades at a historically high multiple despite declining revenue and a long list of problems.
We’ve seen Apple management raise high expectations in the face of mediocre announcements, and I’m worried that this year’s WWDC could be another one of those news-selling situations.
Long term, Apple’s path to market-beating revenue growth remains unclear, even if the next iPhone cycle becomes a huge success.
I consider the stock to be slightly overvalued and reiterate that Apple maintains the position.
Keynote USA News
For Latest Apple News. Follow @Keynote USA News on Twitter Or Google News.