Apple: Ignoring Reality

Summary

• Apple reported a weak quarter, though the market celebrated 1.9% revenue growth.
• The tech giant is forecast to continue growing revenues sub-7% for an extended period.
• The stock continues to trade as if Apple has 15%+ revenue growth while a more realistic PE target would value the stock closer to $100.
• Looking for a portfolio of ideas like this one? Members of Out Fox The Street get exclusive access to our model portfolio. Learn More »

Justin Sullivan/Getty Images News

As predicted and denied by most Apple (NASDAQ:AAPL) bulls, the tech giant reported a rather weak FQ3'22 earnings report last week. Revenues were near the weakest in the tech giant space and crucial Mac revenue actually declined YoY. My investment thesis remains Bearish on the stock, as the stretched valuation only grows with the recent rally back above $160.

Beats Aren't Enough

One of the biggest problems facing Intel (INTC) shareholders was the focus on the quarterly earnings beats while ignoring the otherwise weak results. The chip market finally fell apart and the chip giant ended up reporting a horrible quarter causing the stock to collapse.

While Apple has reported some strong quarters, the market appears to have completely ignored that the June quarter revenues only grew by 1.9%. The headlines appear to paint a far better quarter than the reality.

Source: Seeking Alpha

The tech giant beat EPS estimates by $0.05, but in general the numbers weren't impressive. Over the last decade, Apple has generally reported as many quarters similar to the low growth in FQ3'22 as those in the boom times where revenue growth exceeded 10%.

Data by YCharts

A few days after a quarterly report, an investor should start reviewing the updated analyst estimates to see how the numbers and management comments on the earnings call shaped future forecasts. Over the next few quarters, analysts again predict a period where revenue growth sees significant struggles.

Source: Seeking Alpha

The highest forecasted growth rate doesn't top 7% through the end of FY23 next September. Apple is forecast to see 2 quarters where revenue growth doesn't top 4%. After the tech giant just reported a quarter with revenues inline with analyst estimates at 1.9% growth, investors should start to see these numbers as solid. The period of smashing analyst targets during covid is officially over.

During the quarter, Apple saw Mac revenues decline YoY due in part to supply chain issues, but also due to strong covid pull forwards. The company got hit by the same problems as other tech companies where the massive growth from 2021 makes for tough comps in 2022.

Mac revenues for the quarter were $7.4 billion, down 10% from last FQ3. The new M1 and now M2 chips provide the potential for an extra boost in Mac sales, but the product has long struggled to gain much traction due to price and enterprises entrenched with PCs. The FQ3'22 revenues bring Mac sales right back to the same level reached in FQ1'19.

Source: SixColors

Due to the limited growth reported in the quarter, CFO Luca Maestri even felt the pressure to comfort shareholders with statements on the FQ3'22 earnings call to promote higher growth rates in future quarters:

Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange. On the product side, we expect supply constraints to be lower than what we experienced during the June quarter.

Priced For Perfection

The biggest problem with Apple is that the stock still remains priced for near perfection. The stock now trades at 26x forward EPS estimates despite not even reporting 2% revenue growth in the last quarter.

Data by YCharts

Microsoft (MSFT) has the same forward PE multiple after reporting 12.4% growth in the June quarter. Alphabet (GOOG, GOOGL) trades at a much lower PE multiple and the internet search giant reported the fastest growth of the tech giant group at 12.6%.

Both Microsoft and Alphabet have business models more focused on recurring revenue streams. Apple Services only grew 12% in the quarter further highlighting how such recurring revenues are very dependent on the growth of Products to drive faster growth.

Source: SixColors

For Apple, Services only amount to ~24% of total revenues, yet the tech giant is already seeing these growth rates slow to similar rates as the companies with full business models generally more focused on recurring revenue streams. Microsoft is focused on business software and Alphabet digital adverting to generate fast growth rates for the whole businesses.

Apple remains a great company, but the business is still highly reliant on more cyclical product purchases boosted during covid. The tech giant could face years where consumers pause purchases of Macs and iPads after loading up on such tech gear during 2020/21.

Per CFO Luca Maestri, Services are forecasted to slow even further during the September quarter to the lowest growth rate at least in recent years:

Specifically related to Services, we expect revenue to grow but decelerate from the June quarter due to macroeconomic factors and foreign exchange.

Takeaway

The key investor takeaway is that Apple remains a great company, but the stock is disconnected from the actual results reported by the tech giant. If Apple trades at 15x FY23 EPS estimates of $6.46 similar to the multiple applied to Meta Platforms (META), the stock would trade at $97.

My thesis remains that Apple will continue to trade flat to down for years, as investors eventually face the reality of the slow growth scenario at the tech giant.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[Stone Fox Capital]

At least one analyst is facing reality..

-Bernstein analyst Tony Sacconaghi remains cautious on Apple (NASDAQ: AAPL) stock given the elevated valuation.

-The analyst reiterated a Market Perform rating on AAPL shares and a $170 per share price target.

-“We see some opportunity for Apple to continue to outperform through its iPhone launch in September, per its historical pattern, but we believe risk/reward over the next 6 months - 2 years is neutral to modestly negative. AAPL trades at 26-27x earnings, well above historical levels on a relative basis (1.48x vs. 1.09x), and notably above other FAAMG names with higher growth,” Sacconaghi said in a client note.

[Bradmeister]

@Stone Fox Capital - For many years, Apple skeptic Tony Sacconaghi’s price targets have been well below where the stock actually trades. So I wouldn’t put much stock in his latest $170 price target. Look for him to revise his price target upward to $190 when AAPL breaks above $200 in early 2023… but he’ll still be off.

[All*AAPL]

@Stone Fox Capital said:
--
"At least one analyst is facing reality..
-Bernstein analyst Tony Sacconaghi remains cautious on Apple (NASDAQ: AAPL) stock given the elevated valuation."
--
**Bradmeister covered that pretty thoroughly...you're really reaching when you quote Sacconaghi as a believable source when it comes to AAPL/Apple. He's been wrong for years and you know it. 😎

[Publius Valerius]

@Stone Fox Capital Jan 29 2020 CNBC Headline: "Analyst Toni Sacconaghi defends being cautious on Apple even as shares keep shattering new highs"

Closing price on 1/28/20 = $79.42
Closing price on 1/3/22 = $182.01
Closing price today = $173.03

Again, would you rather be 'Right', or 'Rich'.....?

[Stone Fox Capital]

Full steam ahead on iPhone production means flat production YoY... ala no growth.

-Apple (NASDAQ:AAPL) is reportedly going full-steam-ahead with its iPhone production plans heading toward the end of the year and despite a grim outlook from one of its top contract manufacturers.

-According to a report from Bloomberg, Apple (AAPL) has told its suppliers to make 90 million of its newest iPhones this year, which would be in line with 2021's production levels when the iPhone 13 was introduced. Apple (AAPL) is reportedly looking at building a total of 220 million iPhones in 2022, or roughly the same number of iPhones that were built a year ago.

[Bradmeister]

@Stone Fox Capital - Apple is expected to raise prices on the iPhone 14/14 Pro product lineup relative to this year’s models. So even if your assumption of flat unit sales turns out to be correct, Apple would still report year-over-year iPhone revenue growth in FY 2023.

[Stone Fox Capital]

@Bradmeister
With a price hike, my guess is that units actually slump. My 3-year iPhone has no problems and the technology definitely doesn't warrant a price hike. My next phone purchase will definitely be an iPhone, but my decision will definitely be delayed with 10% price hikes.

[Tippsology]

@Stone Fox Capital the good news for AAPL is that a majority of people are living paycheck to paycheck because they WILL wait in line and immediately upgrade every time a new iPhone is released. Plus there are those that have a 3-4 yrs old phone, so it might be time to refresh.

As a whole, inflation isn’t causing people to be broke, their spending behaviors & choices are.

[C_WAX]

Apple isn’t going to sell many VR devices? How do you know? I certainly don’t, but what I do know is that Apple’s VR headset serves as a bridge to VR glasses, and possibly replace the iPhone, which will likely serve as a massive revenue producer. No pun intended, long term vision here. Historically, it’s never boded well for the long term investor to bet against Apple. And that my friend is reality.

[BigEarn]

@C_WAX Google "best selling VR headset 2022". Spoiler alert: It's not Apple and just happens to be another well known competitor with 3+billion users. Tick tock...

[Danoxx]

@BigEarn Google glasses?

[BigEarn]

@Danoxx (*sigh*) "Google" as in google search. SMH

[Stone Fox Capital]

$AAPL isn't going to sell many VR devices.

-Concerning pricing, Kuo said the Apple (AAPL) headset could be priced between $2,000 and $2,500, with a higher price expected to impact shipments.

twitter.com/...

[colorado buff]

@Stone Fox Capital I wouldn’t count them out. A lot of people laughed at iPhone, and iwatch and look what they did there.

[Stone Fox Capital]

@colorado buff
Not counting them out, just being realistic in how much an AR/VR device is going to move the needle. Through 2025, not much.

[colorado buff]

@Stone Fox Capital okay that’s fair. I would agree. I think it’s more of a 2027-2030 play.

[Stone Fox Capital]

$AAPL just keeps spending more and more. Not sure why they want in the streaming wars so bad.

-On Friday, Apple (AAPL) announced that Apple Card users can get three months of Apple TV+ free, as part of a promote for Apple's (AAPL) new animated movie, Luck. There has been a considerable amount of buzz surrounding Luck, which is produced by Pixar legend John Lasseter. The movie, which carries a price tag of $140M, has scored well with fans, carrying a 75% audience score on Rotten Tomatoes, though it has fared far worse with critics at 49%.

-The offer is applicable for both new and existing Apple TV+ subscribers -- though it is not available for Apple One subscribers -- highlighting just how important Apple's (AAPL) services business is to the future of the company.

[fredrik2109]

@Stone Fox Capital They might make a few nickles directly, but it is more about Brand loyalty and stickiness.

[Stone Fox Capital]

@fredrik2109
but $AAPL doesn't have any brand loyalty issues. They don't need to be spending $140M on a single movie.

[Belegde Boterham]

@Stone Fox Capital

140 m is pocket money

[No Guilt]

Why should I Apple trade as the same PE as meta-the company that they just nuked with the new iOS update???????

[vicwinkler]

@No Guilt you can edit your comment so that we can understand what you intended. (I might end up agreeing with that)

[No Guilt]

@vicwinkler

Why should Apple and Meta have the same PE?

Apple just destroyed 50% of Zuck’s company with the iOS update. Americans are opting out to being tracked by Zuckerberg.

Why assume a 15 PE for both????

[Tippsology]

@No Guilt Your comment simply is not true. 50% of the business? Why didn't META rev and EPS drop 50%? Why doesn't guidance point to any drop? Come on now, let's try to keep things somewhat rational.

[TomasF]

Great article... I agree.

[smadadet]

Apple seems to be ignoring its dependence on China for components and assembly. A war between China and Taiwan with its probable sanctions and embargoes would cripple Apple. They need top force Foxconn into building North American facilities and lessen their supply footprint in China. Investing in China was smart 10 - 20 years ago, but in todays reality, staying there is stupid.

[Ta0]

@smadadet They have shifted their earbuds to Vietnam. I'm hoping they will do more than just that, but I do agree with the concerns you raise. Deglobalization is going to be the death knell for many healthy companies. I shudder to think about it.

[Bossco]

@smadadet - Related news, on the revenue side: "Greater China revenue, which includes Taiwan and Hong Kong, declined 1% year-on-year to $14.6 billion." Small %, relatively speaking, of total global revenue, but would be a bummer to lose as well as supply chain pain.

FWIW - Global revenue makeup:

www.statista.com/...

[davel]

@smadadet
>>

A war between China and Taiwan with its probable sanctions and embargoes would cripple Apple. They need top force Foxconn into building North American facilities and lessen their supply footprint in China.

<<

They are actually doing that now. And with recent American legislation we likely will rebuild critical tech infrastructure here.

[Bossco]

AAPL has been a wonderful investment for me, however I have traded in/out its cycles* - thus in this case do agree with much of author's premise. Recognizing & acting on valuation cycles* = maximizing alpha.
*2012, 2015, 2018 & 2021. The latest out (30% of shares) on 11/2021 at $158.18. With cost basis of ~$18 it was hugely good profit taking time & AAPL frankly too high % of portfolio. 70% remaining now earning divs & will sell next tranche at next target price of $175. Hold forever ? Not me.

[Stone Fox Capital]

@Bossco
$AAPL already hit $183, so why didn't you cash out then? The hold forever crowd just makes no sense. In the history of the stock market, every company has eventually always lost its way. Betting that Apple won't is just pure insanity.

[Bossco]

@Stone Fox Capital - Good question. No doubt hindsight shows waiting a wee bit longer & catch the Dec highs would have been perfect timing but I've no illusions of grandeur here. LOL IIRC at that time next tranche sell was slated for $185 PT, which while very close, never triggered. No regrets. Was/is a great time to have considerable cash to redeploy & optimize alpha quest elsewhere (e.g. ABBV, LMT, MRK, VRTX, VICI).

[All*AAPL]

@Stone Fox Capital said:
--
"@Bossco
$AAPL already hit $183, so why didn't you cash out then? "
--
**He didn't cash out then because, in a year or so, cashing out of AAPL at $183 will, in hindsight, look as just as foolish as you cashing out of AAPL at ~ $110. 😎

[Publius Valerius]

Don't you hate it when the Market doesn't value a stock where you say it should be ... :-)

[Stone Fox Capital]

@SGK
Not always b/c a mis-priced security usually provides an opportunity to take advantage of the market.

[Publius Valerius]

@Stone Fox Capital Had a micro-econ prof in business school who was studying a new field (in 2005) called 'Behavioral Economics'.

You should consider adding some of that to your standard GAAP analysis to help explain why companies like TSLA and AMZN reach and hold the valuations they do.....

[Bossco]

@SGK - "reach & hold" TSLA? Me thinks = bad example for supporting your otherwise decent suggestion. 🤔

[tarheelboy]

Playing options is dangerous, isn’t it?!?!? Lol sell and swallow your loses; you play with fire, you get burned. Been going on with apple for 20 years; Beware clients.

[RonnieM.]

So short sighted. Apple has the opportunity and Capital to invest in so many opportunities, taking its nearly 1 Billion services subs with them.

[Stone Fox Capital]

@RonnieM.
Isn't that far and away reflective in the stock price?

[Danoxx]

@RonnieM. Apple Web services coming up? Can’t hide forever Amazon, Google, and Microsoft…..

[Stone Fox Capital]

@Danoxx
😂 ... like iCloud works so well.

[whiff]

Go buy some MSFT - you will feel better ...

[ds1986]

i agree, should not be priced for 15% growth here! ...should be discounted more for china risk too..

[banmate6]

@Stone Fox Capital

I very much respect your articles and views. And we've discussed AAPL before. But I think my experience with AAPL bears repeating for others and us to continue to exchange ideas.

As always, for corroboration, here is my blog of 3 AAPL investments, long and short term. All have crushed market indices.

seekingalpha.com/...

For the main 1st investment, a $14,817.98 basis is now worth $221,613.89, 1395.57% gain on 28.15% CAGR. 183.3342 dividends valued at $7,847.72 reinvested are now worth $30,517.81.

I posted often AAPL stands a good chance to compress PE gracefully, raising E faster than P. Well, that is happening. It's a current PE ~26, high, but within striking distance of a blue chip fair value PE 20-24 in an extremely low interest env.

For me, AAPL remains a hold. It stands every chance of continuing to expand and innovate. I think my money is very safe. But I agree, I wouldn't put new money in myself right now.

[banmate6]

@Stone Fox Capital

Here are details behind my 1st investment.

Summary:

* current price: $166.46

* total shares: 1331.3342
* basis: $14,817.98
* current value: $221,613.89

* avg $/share: $17.02
* avg $/share offset by dividends: $11.13
* dividend: 183.3342
* total return: 1395.57%
* CAGR: 28.15%

date shares total_price $/share
10-Nov-2010 868 $9,807.43 $11.3000 basis
16-Aug-2012 3.64 $82.15 $22.5700 div
15-Nov-2012 4.368 $82.49 $18.8900 div
14-Feb-2013 4.956 $82.91 $16.7300 div
16-May-2013 6.188 $95.96 $15.5100 div
15-Aug-2013 5.432 $96.64 $17.7900 div
14-Nov-2013 5.152 $97.23 $18.8700 div
29-Jan-2014 196 $3,510.07 $17.9100 basis
29-Jan-2014 56 $1,000.32 $17.8600 basis
29-Jan-2014 28 $500.16 $17.8600 basis
13-Feb-2014 6.636 $128.29 $19.3300 div
15-May-2014 6.552 $139.16 $21.2400 div
14-Aug-2014 5.812 $139.93 $24.0800 div
13-Nov-2014 5.168 $140.62 $27.2100 div
12-Feb-2015 4.66 $141.22 $30.3000 div
14-May-2015 4.984 $156.85 $31.4700 div
13-Aug-2015 5.444 $157.50 $28.9300 div
12-Nov-2015 5.4 $158.21 $29.3000 div
11-Feb-2016 6.712 $158.91 $23.6800 div
12-May-2016 7.536 $175.15 $23.2400 div
11-Aug-2016 6.5 $176.22 $27.1100 div
10-Nov-2016 6.404 $177.15 $27.6600 div
16-Feb-2017 5.308 $178.06 $33.5500 div
18-May-2017 5.092 $197.64 $38.8100 div
17-Aug-2017 4.92 $198.44 $40.3300 div
16-Nov-2017 4.62 $199.22 $43.1200 div
15-Feb-2018 4.908 $199.94 $40.7400 div
17-May-2018 5 $232.58 $46.5200 div
16-Aug-2018 4.46 $233.49 $52.3500 div
15-Nov-2018 4.828 $234.30 $48.5300 div
14-Feb-2019 5.528 $235.18 $42.5400 div
16-May-2019 5.308 $249.14 $46.9400 div
15-Aug-2019 4.804 $250.16 $52.0700 div
14-Nov-2019 3.836 $251.08 $65.4500 div
13-Feb-2020 3.128 $251.82 $80.5100 div
14-May-2020 3.384 $268.81 $79.4400 div
14-Aug-2020 2.3724 $269.51 $113.6000 div
13-Nov-2020 2.2816 $269.99 $118.3356 div
12-Feb-2021 2.0129 $270.46 $134.3622 div
14-May-2021 2.2962 $290.69 $126.5956 div
13-Aug-2021 1.9535 $291.20 $149.0634 div
12-Nov-2021 1.9657 $291.63 $148.3616 div
11-Feb-2022 1.6983 $292.06 $171.9752 div
13-May-2022 2.0856 $305.73 $146.5886 div

[Stone Fox Capital]

@banmate6
Don't really disagree here. While my view is that $AAPL isn't worth $100, the stock is likely to stay at elevated levels. Ones investment in Apple is probably very safe, but one isn't likely to see much in returns for up to 4 years.

[banmate6]

@Stone Fox Capital

My view is that in a yield starved world, quality will command a higher PE. Especially with more global buyers of American instruments. Even USA t-bills still sell well in spite of effectively negative yields...SAFE HAVEN.

AAPL is a safe haven. I argue MSFT, CNI, and so. Such global investors, to be blunt, would rather even lose a % compared to the illicit way they obtained and can invest it domestically. Again: especially in an era of low yields across the world, this factors.

Hey, I also bought into INTC, which you write a lot about. I'm down 20% so far. 🙂 I believe in the too big to fail thesis...as the USA needs foundries for security and economic concerns. Of course, we will see if INTC is a falling knife, but I'm betting so far it isn't and can turn it around.

Like with AAPL, I do some product and market specific analysis. But weight more simple adaptive value investing...as technical minutia, unless egregious, actually can be noise. For now, I believe AAPL will make the best phones, apps, and services...with INTC just in time offering scaled chip manufacturing to spec, and, maybe, innovative chips of their own.

[Bradmeister]

The author’s narrative that AAPL should trade at a P/E multiple of only 15 ignores the reality that Apple is likely to grow revenue and EPS at a pace far greater than his low-ball projections, not to mention the fact that Apple currently generates well in excess of $100 billion in annual free cash flow (more than any other company on the planet). He also fails to account for new AR/VR products that Apple will be introducing in the next 12-24 months. Finally, he over-interprets last quarter’s results, failing to acknowledge that FQ3 is Apple’s slowest quarter and that Apple faced unusual supply chain constraints and China lockdowns—yet still delivered global iPhone unit sales growth.

[Stone Fox Capital]

@Bradmeister
No justification for $AAPL beating analyst estimates by a large margins. Apple hasn't historically done that. Denial isn't a good investment thesis!

[jonnyvern]

@Bradmeister $AAPL's price to FCF (P/FCF) is very elevated right now. It has risen from 5 (pre covid in a low-interest environment) to 6.82 in a rising rate environment. Yes FCF is rising, but the stock price has far outstripped the increase. In fact, it's a 36% increase in the ratio for no reason other than a flight to safety.

[jonnyvern]

@Bradmeister Apple doesn't list iPhone unit growth anymore, remember? Just revenue - and they keep increasing their prices.

[Total Returns]

How do you move the needle at Apple? It’s so damn big…

[moneymanag]

@Total Returns Penetration of the auto market given their inherent ecosystem advantage with consumers who are Apple-centric. An increasing portion of vehicle prices will be integrated electronic systems of various types with more and more infotainment and information systems. This isn't even giving any weight to a possible JV of some type with an EV maker, or if their corporate R&D into battery technology provides any breakthroughs. Look at the performance advantage of their last corporate designed IC's.

[Stone Fox Capital]

@moneymanag
Do you honestly want to pay even more for another infotainment system when you already have an iPad and iPhone with you? Just can't imagine the day where the motor and other electronic components aren't far more important than the infotainment system.

[usermichael]

@moneymanag EV is Low or negative margin business only. Do more harm than good to Apple.

[Cyril R.]

Another article on Apple bearish on valuation. You do realize that everyone who has sold this stock over the past 30 years has regretted this, right? I’m not one to bet against 3 decades of outperformance. Though of course in the short term a bout of selling is always possible, 120 zone is what I would expect, 100 seems unlikely except if bear market continues into a serious recession (current outlook is for a mild recession albeit with high inflation).

[Stone Fox Capital]

@Cyril R.
These arguments are dump. Why argue with some bullish on $AAPL for over 10+ years about the past. Apple didn't get expensive until the last year. Stay focused on the present!

[Celestinogreco]

Forget the groth of the past years . Apple is now a value stock. It‘s safe money with a little groth in the years to come.

[vicwinkler]

@Celestinogreco What exactly are you trying to say?

[Total Returns]

@Celestinogreco so we’re in it for the dividend lol? I guess your point is that at 4% organic growth and 4% buybacks we get a reasonable return? I can buy growth slowing down, but not at current valuation.

[Celestinogreco]

@Total Returns yes that‘s right not a current valuation. I have Apple stocks in my portfolio I bought a couple years ago and I will keep theese stocks I see as safe money but I will not add more at current valuation.

[C_WAX]

Apple, the most valuable company on earth, posts the most impressive earnings during surging inflation and yet again another hit job on Apple for the clicks. Betting against Apple does not bode well for investors, it’s a fools errand.