Apple justifies its premium during peak recession fears (NASDAQ:AAPL)

We previously covered Apple (NASDAQ:AAPL) here. The impact of the Digital Markets Act in the EU was then discussed, which could force AAPL to allow third-party app stores and alternative payment methods in iOS. closed garden. After careful consideration, we have concluded that the new regulations may have less of an impact on the company’s turnover and results than expected.

For this article, we will focus on AAPL’s double failures on the FQ1’23 earnings call and the irrational rally in its stock price afterwards. It appears there may be a noticeable disconnect between the company’s growing NTM price/sales valuation and the deceleration in revenue growth, particularly with the deterioration of the company’s balance sheet over the past several years. . However, with the stock continuing to defy stock market pessimism at a time of peak recession fears, we believe the stock deserves its premium to some extent.

The premium investment thesis

AAPL stock still commands a lofty NTM Price/Sales valuation of 6.04x at the time of writing, notably high compared to its pre-pandemic 3-year average of 3.38x. While this normally points to higher future growth, we don’t know if the company’s performance so far supports this number.

Prior to the pandemic, AAPL reported a CAGR of 6.45% from fiscal 2016 to fiscal 2019, with the pandemic producing a stellar figure of 11.28%. However, analysts’ forward estimates are less impressive, with a projected revenue CAGR of 3.8% through fiscal 2025. That doesn’t quite suggest a high-growth stock in our view.

Although its EPS growth was excellent at a CAGR of 12.7% pre-pandemic and 27.1% during the pandemic, things are expected to slow to a CAGR of 4.8% through fiscal 2025.

We should also point out that part of AAPL’s EPS improvement was also attributed to the decline in the number of shares of -12.9%, from 18.59 billion in fiscal year 2019 to 16.18 billion in the last quarter. However, this feat had cost the smartphone giant a whopping $94.05 billion over the past twelve months. [LTM]which had continued to grow tremendously at a CAGR of 10.5% from $69.71 billion in 2019.

While the company reported excellent free cash flow generation of $97.49 billion on LTM, expanding at a CAGR of 18.30%, much of its robust free cash flow was diverted to its growing share buyback programs. As Bloomberg points out, he “had spent more than 550 billion dollars repurchasing its own stock over the past decade, more than any other American company.”

Notably, AAPL’s balance sheet also deteriorated significantly to net debt of $48.27 billion in the last quarter, from fiscal 2019 levels of -$8.75 billion and levels of fiscal year 2020 of $7.72 billion. While the company’s long-term debt has remained stable at ~$98 billion over the past few years, cash/short-term investments have declined significantly by -48.9% from $100.55 billion in fiscal year 2019 to $51.35 billion in the first quarter of 2023.

On top of that, its dividends were a paltry $0.92 per share compared to the LTM, yielding just 0.6% compared to its 4-year average of 0.84% ​​and its sector median of 1. 44%. This underscores its unlikely prospects of also being a rewarding dividend stock.

Of course, we’re not here to disparage AAPL, since we personally own the shares as part of our retirement plans. On the one hand, the stock exhibits the most crucial trait for any investor’s portfolio, namely its historical and future prospects for outperformance relative to the broader market.

Future performance is not guaranteed by past performance. However, AAPL stock generated a 5-year stock price return of 256.7% and a 10-year stock price return of 847.49%. That was stellar, versus the S&P 500’s 51% and 169.14%, respectively.

Meanwhile, it’s no secret that we’re in the midst of an economic slowdown, as the Fed raises interest rates to the highest levels since 2007. With the forecast terminal tariffs up to 5.1% by mid-2023 and a potential pivot only from 2024, the pain of high interest rates may not subside soon.

Performance of FAAMG shares since November 2021

So how has the stock been affected so far? Well, it is obvious that the AAPL stock is the only one of the FAAMG stocks in the green after the drastic normalization of post-hyper-pandemic levels.

At the time of writing, the stock has been posting 2.41% returns since November 2021, with the rest of FAAMG stocks in the red, particularly Amazon (AMZN) at -41.41% and Meta Platforms (META) at -47.61% so far, with the S&P 500 also down -11.59% at the same time.

The pessimistic pull in the stock market has consistently dragged AAPL stock down from the highs of $170 in 2022 and $150 in recent months, thwarting its attempts to break out of these resistance levels. This was naturally attributed to the spike in recession fears and headwinds from Foxconn in recent months. Its financial performance and balance sheet also leave something to be desired, due to the maturity of the company.

Nevertheless, the outperformance of AAPL stock also defied the market correction to some extent, demonstrating the incredible support it received from institutional and retail investors. The stock included 42% Berkshire Hathaway(NYSE:BRK.B) (NYSE:BRK.A) portfolio worth around $299 billion, which clearly means Warren Buffett’s conviction buy. So it was no surprise that the stock continued to bounce off the $120-$130 support level, despite multiple headwinds in recent months.

While it remains to be seen if AAPL can be recession proof, the stock’s outperformance has been more than stellar. This is especially true as most of the stocks in our portfolio have underperformed in these uncertain times. This feat alone deserves a certain premium, in our opinion, which is why we continue to nibble the stock at its lowest. Of course, the question is, how much is this redeeming quality worth?

So is AAPL Stock a buySell ​​or Keep?

AAPL 1Y EV/Revenue and P/E Valuations

AAPL is currently trading at an EV/NTM Revenue of 5.91x and a P/E NTM of 24.60x, above its pre-pandemic 3-year average of 2.87x and 15.62x, respectively. Otherwise, it is relatively in line with its 1Y average of 5.89x and 24.40x, respectively.

Based on its projected FY2024 EPS of $6.57 and current P/E valuations, we are looking at a moderate price target of $161.62. This indeed suggests minimal upside potential from current levels.

AAPL stock price

This is not surprising, given AAPL’s notable 18.7% rally to $148.48 from the January 2023 low of $125.02. However, we feel that the optimism can be moderately digested in advance, attributed to the warmer than expected weather. CPI January 2023. The latter stoked more concerns about the Fed’s next meeting in March 2023, with 81.9% of analysts expecting another 25 basis points hike then.

Additionally, the AAPL forward guidance is disappointing, with “the year-over-year revenue performance of the March quarter will be similar to that of the December quarter”. We infer that FQ2’23 revenue could also be impacted with a decline of -5.5% year-over-year to $92.2 billion, partly due to a currency impact of up to -5 basis points. percentage.

On the one hand, management guided next quarter’s gross margin improvement to between 43.5% and 44.5%, suggesting potential improvement in cost of goods sold across its product offerings, compared to at levels FQ1’23 of 43% and FQ2’22 of 43.7%.

On the other hand, AAPL’s forecast for operating expenses of up to $13.9 billion implies growing inflationary pressure on labor costs and an acceleration of R&D investments by +10, 4% YoY. While the latter may suggest long-term efforts in future product launches, such as the report mixed reality headset by 2023, Foldable iPad by 2024, and apple car by 2026, we believe this could trigger more short-term headwinds.

We had also seen a similar impact at FQ1’23, with the smartphone giant’s report up and down rate of -3.8% and -3.7%, respectively, despite consensus estimates lowered by -8% due to headwinds from forex and Foxconn.

Therefore, long-term investors might be well advised to wait for a further pullback towards the November 2022 support level in the lows of $130, for an improved margin of safety against our price target. Do not continue this rally.

Interestingly, Warren Buffett had done the same by buying more AAPL at an average price of $129.93 in early 2023, based on Berkshire Hathaway’s latest 13F filing.