A steady stream of bad news for Apple (AAPL) has cast doubt on claims that the world's most valuable company is immune to risks associated with economic turmoil. The failure of a new generation of iPhones in China has raised concerns about Apple's ability to justify its expensive valuation and avoid four consecutive quarters of revenue declines that would be the company's worst performance since 2001. Meanwhile, Apple grapples with political tensions and issues with overheating devices, and KeyBanc this month became the latest company to downgrade the stock.
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James Abate, chief investment officer of CentreAsset Management, said the disconnect between Apple's lack of growth and high stock price is difficult to ignore.
He said: "Apple's growth is the weakest among large stocks, but its stock price has not fallen to the previous price-earnings ratio level when it was not growing." Abate believes that due to Apple's "systemic" importance to the stock market, investors should use put options to hedge Apple's valuation risk.
Apple shares have fallen 10% since the end of July, compared with the Nasdaq 100's 5.6% decline during the same period. Although Apple remains the largest component of the S&P 500, accounting for more than 7.1% of the index's weight, more than $320 billion has been wiped out of Apple's market value.
Its huge market clout makes it difficult for investors to avoid Apple stock, but other large-cap stocks may offer more attractive growth prospects and more reasonable price-to-earnings ratios.
"You can argue for Amazon's (AMZN.US) margin growth, Microsoft's (MSFT.US) and Nvidia's (NVDA.US) AI craze, or Alphabet's (GOOGL.US) and Meta's (META.US) weather," Abate said. The impact of slowing consumer advertising growth finds a compelling fundamental reason, but Apple hasn't had revenue growth in a while. "It's not like Cisco (CSCO) in 1999, which is about to fall off a cliff, but if there is real chaos in the market, it may be stocks like Apple that bear the brunt."
Apple will announce its fourth-quarter results in early November, and analysts expect its revenue to fall 1% year-over-year. Overall revenue for the S&P 500 technology sector is expected to grow 1.5% this quarter, according to Bloomberg Intelligence.
Apple revenue likely to decline for fourth consecutive quarter
Against this backdrop, Apple trades at 26.6 times forward earnings, which is higher than both the Nasdaq 100 and Apple's own long-term average. The stock also trades at a premium, with a free cash flow yield of less than 3.7% on a forward sales basis, compared with its 10-year average yield of about 6.4%.
While Apple is expected to return to positive revenue growth in fiscal 2024, the pace will be well below recent years, and new products like the Vision Pro headphones aren't expected to be meaningful drivers anytime soon.
This has caused some to retreat. KeyBanc Capital Markets recently downgraded Apple to "hold," citing concerns about its valuation and growth potential.
Less than two-thirds of analysts tracked by Bloomberg have given Apple a "buy" rating, the lowest percentage among large stocks so far.
"There are always challenges, but now seems to be a trickier time, especially with price-to-earnings ratios at the high end of their historical ranges," said Michael Kirkbride, portfolio manager at Evercore Wealth Management. "We are very cautious about adding to Apple stock at current price levels, but are willing to buy at lower prices."
Still, Kirkbride said investors may benefit from the skepticism given Apple's ability to handle challenges in the past.
"Apple remains a top global brand, it has unparalleled supply chain expertise, and its free cash flow means its return on capital is unlike any other company," Kirkbride said. "It's worth holding on to."