Apple Inc. (NASDAQ:AAPL) stock has rebounded significantly from its June lows, rising over 25%. The Street has set a low bar for Apple’s pre-Q3 earnings. As a result, the market dismissed the company’s near-term concerns, displaying its faith in CEO Tim Cook and his staff. Notably, most of the recent gains occurred before earnings, implying that the market was fairly confident going into the Q3 report.
In a late-June article by SeekingAlpha, the news outfit stated that NASDAQ:AAPL was likely at a bottom and may hold its June lows. However, we did not advise investors to purchase the dips since we believe AAPL will under-perform in the medium run, even though technology appears to be emerging from a bear market. We maintain our position.
Furthermore, we feel that AAPL’s steep decline is unsustainable. While we do not believe NASDAQ:AAPL is outrageously expensive, we believe there are too many appealing prospects in other growth and technology investments right now. As a result, we downgrade AAPL from Hold to Sell.
The Slowdown Started For Apple Before Its Q3
AAPL reported 1.9% revenue growth in the third quarter, while EBIT declined 4.4% year on year. However, both lines outperformed the consensus expectations (bullish). As a result, AAPL’s pre-earnings rally proved that the market was correct in anticipating better-than-expected results.
Investors should consider the company’s sharply dropping sales pattern in its key revenue divisions. Services grew by 12.1% year on year in Q3, as shown above. However, the iPhone (+2.9Y% oY) and Mac suffered because of China’s COVID lockdowns, with Mac revenue down 10.1% YoY.
As a result, we believe it is apparent that the consumer slowdown did not occur solely in Apple’s FQ3. Normalization from the pandemic’s rapid growth has continued to manifest. As a result, unless AAPL does something spectacular that increases revenue by a factor of ten, why should investors expect it to outperform?
Even Wall Street Isn’t Convinced
Even bullish Wall Street analysts anticipate Apple’s revenue and EBIT growth will slow through 2023 before returning. However, it falls far short of AAPL’s performance over the last five to 10 years. According to consensus projections, the Cupertino company might raise revenue and EBIT by 6.8% and 9%, respectively, in its September’23 quarter. However, it is nowhere near its 5Y and 10Y revenue CAGRs of 11.1%and 12.9%, respectively. It’s also nowhere near its 5Y and 10Y EBIT CAGRs of 12.7 and 12.4 %, respectively.
So, are investors anticipating something big to happen in the near future? Morgan Stanley (NYSE:MS) suggested that Apple’s subscription revenue might help the company earn another $1 trillion in market capitalization.
A more marked transition to a subscription-like business, we believe, could add nearly $1 trillion to Apple’s present market valuation. The market continues to view AAPL as a hardware company. Therefore the stock trades at a significant discount to both software-as-a-service and subscription-based streaming companies. However, as Apple’s installed base matures, retention rates remain stable or even increase from already high levels, and new market opportunities emerge. AAPL achieves sustained growth in spending per customer, investors will shift toward a more lifetime value-based valuing strategy – Barron’s Loup Ventures is even more optimistic, thinking that Apple’s future options would help preserve favorable sentiments in the tech titan.
More importantly, there are other possible future growth sources beyond FY23. It encompasses health, AR/VR headsets, and possibly automobiles. I hope these potential game changers would benefit AAPL’s multiple in the coming years. – Loup.
Ming-Chi Kuo, a well-known Apple analyst, estimates that AAPL might ship 10 million AR/MR units by 2025/26, vying with Meta’s (NASDAQ:META) ecosystem to define the “metaverse.”
However, while we recognize Apple’s exceptional execution and supply chain resiliency, we believe it is insufficient to justify its price over the next four years. We believe Apple’s big break will come with Apple Car. But, for the time being, that appears to be a pipe dream, and investors are warned not to bet on hope.
Is Apple Stock A Buy, Sell, Or Hold?
AAPL has rebounded admirably from its June lows. While we expected its June low to hold, we were surprised by the speed and extent of the recovery.
Nonetheless, we feel the fast rise from June lows is unsustainable. As a result, we anticipate that AAPL will encounter considerable selling pressure at its near-term ($166) and intermediate ($180) resistance levels. As a result, we believe the potential upside is becoming increasingly unappealing and do not urge investors to increase additional positions at current prices. Instead, investors should exploit the current levels to diversify from AAPL into undervalued growth and technology stocks to ride the anticipated recovery.
As a result, we change our rating on AAPL from Hold to Sell.
Featured Image: Megapixl © Plotnikov
