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Apple: Hardware King Living In A Cloud-Based World
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Apple (AAPL - Free Report) , the second-largest publicly traded company in the US by market cap, was downgraded by Goldman Sachs (GS - Free Report) today (4/17), making it the third downgrade from the bank in only 2 months. GS lowered its AAPL price target to $233, which would represent a 20% discount to what it was trading at before the revision.
Apple has reigned the hardware king in the US for more than a decade, with the sleekest and most cutting-edge devices. The company has relied on its flagship product, the iPhone, for the majority of its top and bottom-line growth. This reliance on iPhone sales has caused its income statement to be quite cyclical. The company’s massive cash pile that was used for extensive stock buybacks and dividends was enough of a cushion to incentivize investors to keep pouring money into these shares.
Now Apple is facing some significant hurdles with supply chain issues in China and global demand halting caused by the pandemic. iPhone sales fell 14% in 2019 and are expected to fall further this year. Goldman analyst estimated that iPhone shipments would drop by 36% in the second quarter as international demand for these expensive devices plummets.
Apple is a hardware giant in a software-driven world. Cloud-computing and subscription-based revenue is now propelling the tech sector. Apple has been attempting to adapt to this secular shift, but they are late movers. The enterprise entered the streaming space with Apple TV+ and launched Apple Arcade last fall. Apple’s services still only make up 18% of total sales.
The hardware giant just released a ‘cheaper’ iPhone SE ($399 price tag) on April 15th ahead of its much anticipated 5G release later this year. This is an attempt to spur demand in the face of the global economic pause. Apple is counting on its 5G iPhone release to drive the company back into healthy growth.
Here is how I see it: the global economy is entering a medically induced recession, and people are getting laid off by the tens of millions. I don’t think that the world will be ready to spend another $1,000-1,200 on a new phone when theirs already functions just fine. 5G is being rolled out at a snail’s pace, and it is only available in a handful of cities across the globe. People who want a 5G smartphone likely already have it with Apples biggest competitors Huawei and Samsung selling them now.
There is still a large group of loyal Apple customers that will line up for its newest products, but will that be enough to continue its topline growth? The company needs better international penetration, and according to its latest annual report, it isn’t getting it, with negative YoY growth in every country outside the US (except the Rest of Asia Pacific, which is its smallest operating region).
Apple still has a healthy balance sheet with more than $100 billion in cash & equivalents and a dividend yield of around 1%. Still, I believe that this stock is overvalued. It is currently trading at a rich trailing P/E of over 22x, which is at the highest end of its 5-year range (10x – 25x). In the past year, AAPL’s P/E multiple more than doubled as investors anticipated big things from the company’s subscription-services segment. I don’t think that this valuation run-up was justified.
Take Away
AAPL is never a stock that I would bet against, but it may be something that you hold off buying and even decrease your exposure until it adjusts to a more reasonable multiple. I agree with Goldman’s sell rating.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
Apple: Hardware King Living In A Cloud-Based World
Apple (AAPL - Free Report) , the second-largest publicly traded company in the US by market cap, was downgraded by Goldman Sachs (GS - Free Report) today (4/17), making it the third downgrade from the bank in only 2 months. GS lowered its AAPL price target to $233, which would represent a 20% discount to what it was trading at before the revision.
Apple has reigned the hardware king in the US for more than a decade, with the sleekest and most cutting-edge devices. The company has relied on its flagship product, the iPhone, for the majority of its top and bottom-line growth. This reliance on iPhone sales has caused its income statement to be quite cyclical. The company’s massive cash pile that was used for extensive stock buybacks and dividends was enough of a cushion to incentivize investors to keep pouring money into these shares.
Apple Inc. Price, Consensus and EPS Surprise
Apple Inc. price-consensus-eps-surprise-chart | Apple Inc. Quote
Now Apple is facing some significant hurdles with supply chain issues in China and global demand halting caused by the pandemic. iPhone sales fell 14% in 2019 and are expected to fall further this year. Goldman analyst estimated that iPhone shipments would drop by 36% in the second quarter as international demand for these expensive devices plummets.
Apple is a hardware giant in a software-driven world. Cloud-computing and subscription-based revenue is now propelling the tech sector. Apple has been attempting to adapt to this secular shift, but they are late movers. The enterprise entered the streaming space with Apple TV+ and launched Apple Arcade last fall. Apple’s services still only make up 18% of total sales.
The hardware giant just released a ‘cheaper’ iPhone SE ($399 price tag) on April 15th ahead of its much anticipated 5G release later this year. This is an attempt to spur demand in the face of the global economic pause. Apple is counting on its 5G iPhone release to drive the company back into healthy growth.
Here is how I see it: the global economy is entering a medically induced recession, and people are getting laid off by the tens of millions. I don’t think that the world will be ready to spend another $1,000-1,200 on a new phone when theirs already functions just fine. 5G is being rolled out at a snail’s pace, and it is only available in a handful of cities across the globe. People who want a 5G smartphone likely already have it with Apples biggest competitors Huawei and Samsung selling them now.
There is still a large group of loyal Apple customers that will line up for its newest products, but will that be enough to continue its topline growth? The company needs better international penetration, and according to its latest annual report, it isn’t getting it, with negative YoY growth in every country outside the US (except the Rest of Asia Pacific, which is its smallest operating region).
Apple still has a healthy balance sheet with more than $100 billion in cash & equivalents and a dividend yield of around 1%. Still, I believe that this stock is overvalued. It is currently trading at a rich trailing P/E of over 22x, which is at the highest end of its 5-year range (10x – 25x). In the past year, AAPL’s P/E multiple more than doubled as investors anticipated big things from the company’s subscription-services segment. I don’t think that this valuation run-up was justified.
Take Away
AAPL is never a stock that I would bet against, but it may be something that you hold off buying and even decrease your exposure until it adjusts to a more reasonable multiple. I agree with Goldman’s sell rating.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>