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Apple Nears All-Time High: Is the Tech Giant Too Extended?

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Apple stock has been in ultrasonic mode this year. After a series of higher highs and higher lows along with fresh 52-week highs, Apple (AAPL - Free Report) shares have now soared back near all-time highs, as the tech giant has benefitted from strength in the large-cap tech space. The bullish theme around artificial intelligence certainly hasn’t hurt either.

After a nearly 40% surge in 2023, are Apple shares now too far extended, or is the rally just getting underway?

Plenty of Skepticism Remains

Let’s take a step back for a moment and think about general market conditions. The American Association of Individual Investors publishes an investment sentiment indicator that shows the percentage spread between bulls and bears. The indicator currently sits at -12.31%, lower than the long-term average of 6.39%. This illustrates that bearishness continues to dominate U.S. investor sentiment.

Image Source: YCharts

Despite the technical progress this year, investor positioning also remains significantly bearish. A recent Bank of America Global Fund Manager Survey from May illustrated that investors were the most underweight equities relative to bonds since the Great Financial Crisis. This survey looks at more than 600 money managers, and it is quite apparent that overall positioning is defensive as high levels of pessimism remain.

Remember, the crowd is usually wrong. The lack of respect for the market’s recovery will likely aid a continuation of the recent rally off the 2022 lows.

The Business of Apple

Apple is engaged in the designing, manufacturing and marketing of mobile communication and media devices, personal computers, and portable digital music players. Headquartered in Cupertino, California, Apple’s well-known products include the iPhone, iPad, Mac, and Apple TV, along with its software applications like iOS and the MAC OS X operating systems.

In addition to the sales generated from the devices mentioned above, Apple’s business contains a Services segment that includes revenues from cloud services, the App Store, Apple Music, AppleCare, Apple Pay, as well as other licensing services that have become a major cash cow. Apple currently has more than 935 million paid subscribers across the Services portfolio.

If that all wasn’t enough, Apple dominates the Wearables market, as consumers continue to adopt products like the AirPods and Apple Watch. Apple has made significant headway in this area, strengthening its presence in the personal health monitoring space. Other services include Apple News+, Apple Card, and Apple Arcade.

An increased focus on autonomous vehicles and augmented reality technologies presents a growth opportunity over the long-term. Apple is expected to ramp up its efforts with new offerings, and has clearly benefitted from the AI theme this year.

The Zacks Rundown

Apple is part of the Zacks Computer and Technology sector, which currently ranks in the top 50% of all Zacks Ranked sectors. Because it is ranked in the top half of all sectors, we expect this group to outperform the market over the next 3 to 6 months, just as it has year-to-date with a 31% return:

Zacks Investment Research
Image Source: Zacks Investment Research

Historical research studies suggest that approximately half of a stock’s price appreciation is due to its sector and industry group combination. In fact, the top 50% of Zacks Ranked Sectors outperforms the bottom 50% by a factor of more than 2 to 1.

By focusing on leading stocks within the top 50% of Zacks Ranked Sectors, we can dramatically improve our stock-picking success.

AAPL has exceeded earnings estimates in three of the past four quarters. The company most recently delivered fiscal second-quarter earnings back in May of $1.52/share, beating the $1.44 Zacks Consensus Estimate by 5.56%. Apple has posted a trailing four-quarter average earnings surprise of 2.65%.

Zacks Investment Research
Image Source: Zacks Investment Research

AAPL is currently a Zacks Rank #3 (Hold) stock. The tech giant is projected to see a slight decline in earnings and revenues this year relative to 2022.  

The Zacks Consensus Estimate for Apple’s full-year earnings sits at $5.99/share, a -1.96% decline from last year. Sales of $384.49 billion would translate to a -2.5% drop. But given Apple’s history of beating estimates, it wouldn’t be too surprising if these figures ended up being a bit light.

What to Do Now

While Apple shares do appear to be a bit extended in the short-term, buying stocks when they make new highs has proven to be profitable throughout history. A stock eclipsing a previous high should be viewed as a sign of strength. Still, investors may consider waiting for a pullback before entering a new position, particularly if they have added other names recently.

But the market is telling us to expect the unexpected. A resilient U.S. consumer along with a bullish artificial intelligence theme has helped push tech stocks like AAPL back near previous highs. Make sure to keep an eye on this tech behemoth as the stock is now less than 1% away from a new all-time high.

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