With iPhone 14 demand showing signs of slowing in the first few weeks after launch, we think the financial estimates are pretty rosy for Apple Inc. (Nasdaq: AAPL). I expect analysts’ estimates for 2022 And the year 2023 will start to unfold in the next few weeks to reflect reality. Furthermore, with the stock still trading at 25x Fwd P/E, high by historical standards, I think there is a significant downside to the stock price. I recommend investors to stay on the sidelines.
China loves apples
A few days ago, I read something interesting Article – Commodity In a blog focused on Chinese business discussing the rapid cooling in the scalping market for the new iPhone 14.
First, a brief introduction for those who are not familiar with the speculative market. Since the introduction of the iPhone 4 and 5 models a decade ago, there has been Informal gray market In speculation for new iPhones in Hong Kong and China. At the initial release, speculators would buy dozens to hundreds of phones, then resell the devices for a few hundred CNY/HK dollars. At the height of the frenzy, some speculators reportedly made profits in excess of CNY 1 million per month, resulting in iPhone 6 scraps of CNY 5,000 to CNY 6,000.
The presence of these speculators is the reason why Apple often reports hardware shortages when launching a new model, as scalpers literally push people To line up and get the devices to them.
Speculators sell devices at a discount
Fast forward to the iPhone 14, and it seems life hasn’t been great for the speculators. According to a businessfocus.io article, since the launch of the iPhone 14 two weeks ago, speculators have been hoarding the devices in the hope of a significant price hike. However, in recent days, speculators have been interviewed to obtain 100-500 CNY Discount to MSRP to offload their inventory, as sales have stalled.
In fact, if you do a keyword search on Google (which translates as “Apple 14 selling at a discount of 100”), you will find plenty of mentions on Chinese social media of speculators selling iPhone 14 at a discount (Figure 1).
Apple is rumored to abandon plans to increase production
Overnight on September 27, Bloomberg News reported that Apple told its suppliers to back off plans to increase production by up to 6 million units in the second half of 2022. Instead, Apple plans to keep phone production steady at 90 million units. . This basically confirms the weak demand noted in the businessfocus.io article.
Financial estimates too rosy?
Currently, financial analysts expect Apple to report mid-single-digit revenue growth (“MSD”), expanding EBITDA margins in fiscal year 2022, and MSD EPS growth (Figure 2).
I think these estimates are very rosy. First, if we look at Apple’s nine-month year-to-year financial results on June 30, 2022, we see that a lot of the year-over-year growth was from iPhones and services, which collected $18.6 billion from $21.7 billion in annual growth.
Now supposing the flat phone size growth (if the Bloomberg article is to be believed), and given this phone Fixed pricing In the United States and China, the company’s consolidated MSD growth is hard to come by.
Moreover, with inflation in labor and materials soaring, it’s hard to fathom how analysts continue to estimate Apple’s expansion margin. Referring to Apple’s third-quarter year-to-date financial summary, we can see that while net sales grew 7.7% to $304.2 billion, R&D expenditures actually grew 21.1% year-over-year, and generals also grew. General and Administrative by 14.0% on an annual basis (Figure 4). At some point, if growth slows to low single digits or worse, and expenditures continue to rise at a strong rate due to inflation, we should start to see margin pressure.
Apple gets an F for the rating
While Apple is a great company and continues to produce products that consumers love, the rating multiplier is simply outrageous. When looking for an Alpha rating tool, the rating tool gives it an “F” rating, with Apple stock trading at 24.9x Fwd P/E, well above the sector average at 16.9x.
Extended Multiple Assessment vs. Date
In fact, this was not always the case. If we look at Apple’s historical valuation, we can see that before the COVID pandemic, Apple’s Fwd P/E multiplier was hovering around 15x, which is understandable for a company that is only growing at MSD growth rates.
However, the COVID and Apple pandemic turbocharged valuations have traded as high as 35x Fwd P/E. With the Fed continuing to raise rates, we believe there is a high probability that valuation multiples will compress across all sectors and industries. If Apple just goes back to the upper end of the previous range, 20x Fwd P/E, we might be looking at a significant downside in terms of stock price. Based on a consensus EPS estimate of $6.10 per share, a 20x Fwd P/E would argue at $122 per share.
With iPhone 14 demand showing signs of slowing in the first few weeks of its launch, we think the current financial estimates are pretty rosy for Apple. I expect analysts’ estimates for 2022 and 2023 to begin lowering in the next few weeks to reflect reality. Furthermore, with the stock still trading at 25x Fwd P/E, high by historical standards, I think there is a significant downside to the stock price. I recommend investors to stay on the sidelines.
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