“Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity."
This article is primarily a reflection of the current state of the market as a whole. With a closer look at Apple a stock which seems to be doing... Suspiciously well too well compared to other stocks in similar positions.
Currently as of August 18th, Apple is trading at $171. AAPL has been on upwards rally ever since around mid-June., from a low of $130 all the way to 171 in two-months. It's not an uncommon thing to see such a rally ahead of earnings but such a sustained reaction to a rather mediocre earnings warrants one to take a closer look.
Apple's recent earnings only reported a 1.9% revenue growth. Apple bear EPS estimates by $0.05, an earnings beat but definitely not ground-breaking and management and analysts seem to agree as the forecasts going forward seem to be less ambitious. All the forecasted revenue over the next 5 quarters don't go over 7% with some quarters expecting YoY growths of less than 4%. The forecasted revenue numbers are not bad by any means but price of the stock trades now as if Apple has double digit revenue growths which it clearly does not expect to get.
Moreover, Apple's most flagship products the iPhone, iPad, Mac etc. have slowed down in growth due to the maturing of the markets for such devices. iPhone sales accounted for 49% of Apple's revenue and its revenue growth as only 2.5% YoY. iPhone launches in the recent years have been somewhat underwhelming to say the least. The general response to the subsequent releases after the iPhone X has been sort of like "Yeah ok it's alright". Similar things are happening to the iPad and Mac markets as it too is experiencing slowdowns in revenue growth with the Mac being the most pronounced example dropping below its previous YoY revenue at only 7.4 billion.
Though Apple still maintains extreme profitability with its handheld devices due to the "Apple Ecosystem" it has created around their devices. They will need to expand into new markets to get to back to their old revenue growths. So increasing EPS via stock buybacks and trying to milk as money (improved margins) from their existing products might not be enough.
Apple like a lot of tech companies is starting to transition into their services. How's that going? Well Apple Services amount to around 24% of its revenue with a 12% YoY revenue change in the latest quarter and it's performance over the past few quarters is lower than expected. The App Store has seen some resistance in the form of regulatory changes in the EU, UK, South Korea... the licensing business is also under the scope of the policy makers as concerns of monopolistic behaviour are discussed. Apple entries into the music space with Apple Music and the streaming space with Apple TV are saturated markets to say the least and with competition from Amazon, Google, Netflix, Spotify and all these other companies will surely mean that Apple's profitability will be hindered by strong competition. The slowing of growth rates of Apple and the entire service industry as a whole is a reflection it's very competitive nature. So Apple is still very much reliant on it's physical products for now.
Apple currently trades at around a PE of 26 versus the S&P 500 average of 15. Despite Apple's subpar revenue growth it seems to be a cut above the rest in the minds of investors.
Right now, Apple is the bluest blue chip stock of them all which naturally makes it a very solid defensive position in a recession like that of Coca Cola and P&G. Great great balance sheet, great CEO, very profitable. What can go wrong? Well unlike Coca Cola and P&G, Apple is still a tech/luxury products company which means that most of it's products are high-end luxury products, since Apple doesn't have any thing like Coke Bottles or Diapers, Apple will start to feel recession pains a bit more as people generally will turn to cheaper alternative products when they don't have the money for the latest Apple products. So Apple for the most part should not be treated like KO or PG due to it's reliance on more expensive physical technological products.
Apple is also not the only tech company with a great balance sheet. In fact companies like Google and Microsoft still have the financial health to be in the same realm as Apple. PEG wise MSFT, GOOG are all trading at a lower PE ratio and with a lower PEG. Meaning that they are growth faster relative to the current share price and they are valued lower when compared to Apple.
The inflated price of Apple can also be due to large amount shares being held by passive instruments which can inflate the price of stocks in the S&P 500 most notably Apple as it is the most valuable stock in the index currently 29.31% of 59.88% shares outstanding are held by passive instruments.
Short term supply chain risks are definitely a big threat for Apple as COVID lockdowns in China could significantly hinder it's supply. Also due to China's current political tensions with the world, Apple is in the crossfire and can easily be kneecapped by politics, which again chips away at Apple's so called defensive blue chip status.
In its current state I can't seem to justify Apple's insanely high valuation, lack of clear direction for diversification, worsening macro environment, exposure to political instability means that the current valuation for Apple just doesn't make sense. The company is still insanely profitable but the price is disconnected from reality. If the stock traded more like the other tech stocks around 20 PE or less, AAPL should trade around $130 at best.
