The market and banks put pressure on Apple
Apple (AAPL.US) has taken a hit from Bank of America (BofA), which recently downgraded the company from "Buy" to "Neutral" and cut its price target from $185 to $160 (-13.5% ). In fundamentals, the company had a 2023 revenue estimate of $406.5 billion (+4% year-over-year) and EPS of $6.24 (+3.5%), which it now sees reduced to $379 billion (-6 .77%) and $5.87 (-5.93%), which are lower than the current consensus of $412 billion and $6.46. Where is the background for this BofA decision?
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Apple's stock has outperformed not only most of its large-cap competitors, but also the market as a whole. Like many big tech names, Apple is facing a slower demand environment in 2022, but stocks have been treated very differently as companies of similar caliber like Alphabet (GOOGL.US) have seen their shares fall more than 30% to date. Or the biggest drop in the group belonging to Meta Platforms (META.US), with a loss close to 60%.
But because Apple is the one that falls the least, it is not an indication that its price does not continue to fall, or that the effect of investors' risk aversion does not imply a greater fall for Apple, among all the FAAMNG.
Despite being the heaviest weight in FAAMNG (its market capitalization is $2.29 trillion), Apple shares float in the air against all laws of logic and gravity and feel much better than other companies large-cap technology. Fact: If Apple were its own sector in the S&P 500, it would be the seventh largest sector out of 12: crazy.
However, sheer weight isn't the most important thing in Apple's Gravity; in fact, it is the most expensive mega-cap tech company by valuation, with the possible exception of Amazon (AMZN.US) multiples.
Taking into account the full range of risks, from the debt crisis in China to the global recession, which in fact apply to all companies without exception, Apple at this point is still breaking the law of gravity, so to speak. Even despite the particular selling pressure of the last few days, this stock remains expensive while other indicators that should justify it are not prominent enough.
What does it mean? The higher the valuation of the company (absolute and compared to its competitors), the higher the margin it should have, as well as the estimates of results for the future. This is not the case with Apple at all.
Changes in estimates
Over the last 3-6 months, Apple's earnings estimates have seen very few revisions and the consensus is that EPS will fall by approximately 5.9% over the next 2 fiscal years ending in September. Given the current macro context, these projections are likely to be in the spotlight.
According to data from Sensor Tower, Apple's global app store revenue saw a decline in July and August, falling more than 5% in September. While this may not be representative of a long-term trend, the short-term slowdown indicates that Apple's services business may be moderating. Services account for nearly 1/5 of Apple's revenue. The app store and licensing (for example, Google payments to have Google Search as the default search engine) account for more than 60% of service revenue.
Potential brake on sales
Another big concern is the weaker sales of the iPhone 14. We recently learned that Apple has just canceled its plan to ramp up production of its iPhone 14 and will stick to the original estimate of 90 million units (same as 2021). While this is still a respectable feat considering the smartphone market is expected to decline by 6.5% to 1.27 billion units in 2022 (IDC), it's hard to see iPhone 14 sales exceeding expectations by a wide margin. margin.
The table above compares the average delivery times of the iPhone 14 family with previous models. The key takeaway here is that, on average, it doesn't take that long for consumers to pick up a new iPhone this year. For example, we can see that average delivery times for the iPhone 14 Pro have trended down from 30 days (on day 14 since launch) to 25 days vs. 31 days for the iPhone 13 Pro in the same period. from last year. Understandably, 2022 iPhone demand won't be as strong as 2021 and 2020. For other devices like iPads and Macs, demand is even more likely to see a reversal to pre-Covid levels.
Although Apple has been monetizing its iOS installed base extremely well by growing its high-margin services revenue by 16% in FY2020 and 27% in FY2021, any revenue growth from here will follow largely dependent on handset sales, as iPhone/iPad/Mac accounts account for 53%/7%/9% of total revenue.
Source: BofA estimates, Apple data
According to BofA estimates, Apple's total revenue will experience a 3% year-over-year decline in FY23, with services being the only segment generating growth. This seems conservative considering that Wall Street is currently projecting total revenue growth of 4.9% in FY23. Therefore, it appears that BofA has well-founded reasons to believe that Wall Street's estimates are still too much. optimists. Consequently, we should not be surprised to see more analysts jumping on the downgrade bandwagon in the coming weeks or months.
It is interesting to pay attention to the following chart taken from the BofA report, and note the relatively unreliable level of the tech sector, which broke above its support level relative to the S&P500 (SPX) after last week's recent sell-off:
source: Bank of America
In this context, it translates that Apple has little chance of remaining the last bastion in this sector. The Head and Shoulders structure projects a strong drop in the sector against the benchmark index and where Apple is no exception in this potential movement.
If we look at the technical picture of Apple below, it has little chance of showing a recovery soon enough to offset all the risks a bullish investor would be taking. Yes, stock is very oversold at the moment, and there is strong support ahead that could push the price of AAPL.US higher in the short term, but only in the short term.
The trading opportunity based on buying AAPL.US when its RSI is below 30-35 and then selling when it is above 68-70, has delivered average returns of +14.46% over the past year and calls for buying AAPL now. The control at $129 per share is the lower limit from which the storm could start.
Therefore, the contrarian opportunity based on short positions at overbought extremes may make more sense today.
Apple is not immune to macroeconomic pressures, as demand for consumer electronics soared during the pandemic and will likely take a backseat now that everything from rent to food is significantly more expensive. With shares down 22% YTD vs. the S&P 500 (SPY) 25%, it's clear the markets have been treating Apple as a safe haven as no fund managers are likely to be fired for turning it into the largest position in their portfolios.
This situation is tricky, because groupthink is as dangerous as , this type of groupthink is just as dangerous as the “Nifty-Fifty” (an informal designation for a group of approximately fifty large-cap stocks on the New York Stock Exchange). New York in the 1960s and 1970s), when investors religiously believed in so-called "one decision" stocks like IBM and Polaroid, which led to a disastrous outcome in the bear market that followed right after. Despite Apple's incredible business, stocks don't always mirror business, and investors should think carefully before piling their capital on a single stock on this premise while the entire market is falling.
Darío García, EFA
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