My Detailed Thoughts on $AAPL

We think Apple should be a good short-term trade due to historical precedent surrounding their upcoming iPhone product launch, but we would avoid it for long term investors due to its slow growth relative to its high valuation.

Short-term, Apple’s stock was oversold on a relative strength basis coming into 8/18/23. Since the early 2000s, Apple’s stock is also up nearly 70% of the time the month before a new product launch with an average return of over 3%.  But the stock typically declines the day of the product launch. We expect the new iPhone launch event to be around 9/13. 

Given the S&P return is only up slightly over this same month before a product launch, we are likely to pair our long Apple position with a short on the S&P.  Given our fund is managed to be an “all weather fund” that is expected to generate positive returns regardless of market conditions, this fits in well with our style. Our net exposure is expected to be a low ~25% (% of assets long minus % of assets short) over time with minimal drawdowns even during severe market corrections.  This is how the fund was up both last year with the S&P down nearly 20% and is up this year as well.

We also manage positions around high probability events to try and generate short-term profits even if it is in sharp contrast to our longer-term views.  The long-term is made up of a series of short-term events. The data that comes in over the short-term will logically influence our view on the long-term.

This trading pattern for Apple worked well around their most recent product launch.  Apple’s stock rallied 9% in the month prior to the introduction of their mixed reality headset on June 5th while the S&P rallied 5%.  This is despite the headset likely being an immaterial 1% of revenues over the near-term. An optimistic 1M units sold at $3,499 is $3.5B in revs which compares to total company revs of $387B in CY 22.

My view remains that currently, Apple is the most over-valued mega-cap tech stock relative to its growth rate. Revs grew 2% last calendar year and the estimate is for 1% growth this year and Apple trades at a 28x CY23 PE.  This compares to the S&P rev growth of 4% with a PE of 20x for CY23.  If you look at rev growth in 2022/rev growth in 2023/ & CY23 PE for other mega-cap names that are comparable, MSFT is 10%/9%/30x; GOOGL is 10%/8%/23x and $META is -1%/14%/21x.

Apple just reported their third quarter in a row of negative y/y revenue growth and “guided” their September quarter revenues to be down y/y and below consensus as well. This follows Apple guiding down the June quarter revenue estimates relative to consensus after the March quarter was reported. The last time Apple had 4 consecutive quarters of y/y revenue decline was over 20 years ago in 2001. 

From a longer-term perspective, this puts Apple’s growth back to pre-Covid levels.  In FY19, prior to Covid super-charging revenue growth, Apple revs were down 2% y/y. Revenues were also down y/y for both the December quarter of 2018 and March quarter of 2019.  For the industry, global smartphone demand was also down for four consecutive years prior to Covid. Covid supercharged smartphone sales as people were forced to live, play and learn from home.

From a valuation perspective, during the summer doldrums in August of 2019, after Apple had reported lackluster June quarter results of 1% revenue growth (though an improvement from the prior 2 quarters of -5% y/y each), the stock traded at an 18x trailing PE versus 29x today.

Looked at a different way, both revs and EPS for the just reported June quarter have declined back to similar levels of the June quarter of 2021 with revenue flat and EPS a bit lower (-3%). However, the stock on 8/18/21 was trading at $146 and appreciated to $174 this past Friday (8/18/23).

This multiple expansion for Apple has even less support when compared to the market multiple which has declined.  On 8/18/21, the trailing PE for the S&P was 26x and declined to 21x by 8/18/23. Apple’s multiple remained constant at an inflated 29x despite no revenue growth over that time. By comparison, Google’s multiple has contracted from 34x to 26x while growing revs 21% in the June quarter of 2023 versus the June quarter of 2021. Meta’s multiple has contracted from 26x to 23x while growing revs at 10%. Microsoft’s multiple has contracted from 37x to 32x while growing revs at 22%.

Longer-term, we believe consumer demand for Apple products will be less than expected during the holiday quarter due to:

1. ~40M student loans having to get repaid starting in October
2. the consumer burning through the last of the excessive savings built up during the pandemic which peaked at over $2 trillion
3. higher financing costs for iPhones due to the higher interest rate environment
4. a tougher economic climate due to the normal 15 month lagged effect of rate increases and tightening credit conditions due to bank failures and credit downgrades
5. China demand remaining lackluster
6. A continuing shift in consumer spending from goods back to services

In summary, though we think Apple should be good for a short-term trade on their product cycle launch just based on historical trading patterns, we would avoid the stock on a longer-term basis.