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Apple Is A Strong Sell On High Valuation & Business Cycle Change

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Apple Store

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I precocious looked astatine Apple (NASDAQ:AAPL) and was amazed that astir articles rated nan banal arsenic a clasp aliases buy, pinch only 4 waste ratings retired of 44, of which conscionable 1 arsenic a beardown sell.

Analysts are bullish connected Apple stock

Apple banal SA authors standing breakdown (Seeking Alpha)

I spot Apple arsenic a beardown waste and overvalued for 2 very elemental reasons: A precocious valuation and slower than expected maturation ahead.

Let maine commencement by discussing what is presently priced successful nan stock, elaborate connected really it is improbable those expectations will beryllium met and reason by showing really nan consequence of investing successful Apple is precocious while nan reward is low. Not a business I for illustration to beryllium successful erstwhile it comes to investing.

What Is Priced In

A look astatine EPS estimates is simply a straightforward measurement to spot what are nan expectations priced successful a stock. My rumor pinch EPS estimates is that those are usually linear successful quality and excessively short-term for investing purposes. Most analysts make only two-year estimations because those are Wall Street's standards and moreover erstwhile they make those, it is usually based connected past trends.

Apple banal EPS estimates

Apple banal EPS estimates (Seeking Alpha)

The statement is that Apple will spot level net for 2023 arsenic we person seen a slower quarter, but going guardant analysts expect Apple will simply proceed to turn astatine astir 10% per year. Of course, if 2023 is conscionable a region maturation twelvemonth and maturation resumes onward, Apple deserves nan existent valuation of 25. If so, net are expected to double complete nan adjacent 7 years, and nan banal should follow, each other equal.

However, I've been pursuing Apple for a while and I cognize that linearity is not really Apple's business works. In 2016 I considered Apple a buy because Wall Street's expectations were of nary maturation up based connected conscionable 1 twelvemonth pinch declining revenues and stagnant iPhone income (2015). The P/E ratio was 10 and fewer liked Apple's outlook. Now successful 2023, aft 2 awesome years of beardown growth, Wall Street mightiness beryllium excessively exuberant.

Apple banal 10 twelvemonth gross growth

Apple 10 twelvemonth gross (annotations by author) (Seeking Alpha)

Especially aft a fewer years of bully growth, it is communal for Apple to present a diminution successful revenues and result profits. In conscionable 3 years, from 2019 to 2022, Apple has enjoyed 51% gross growth. We tin surely property portion of that maturation to nan accrued savings owed to stimulus, accrued utilized of gadgets for illustration phones and little spending connected eating retired aliases travelling. But, successful statement pinch humanities cycles for apple, I would reason 1 should expect a important diminution successful revenues and profits successful nan coming years.

Apple's gross diminution has conscionable started and is still mini pinch revenues declining 5.5% and profits declining 13% for nan December 2022 4th compared to 2021. The expectations are for nan diminution to beryllium impermanent but pinch excess pandemic savings mostly depleted fixed that consumers successful nan US spent much than $1 trillion successful 2022, and immoderate of that spending surely went to Apple, I don't deliberation Apple will present connected nan exuberant maturation expectations Wall Street has.

Consumer spending  should diminution and deed Apple stock

Consumer savings accumulated (JP Morgan Asset Management)

On nan bullish side, Apple could ever travel up pinch immoderate caller astonishing product, summation work revenues to compensate for slower income aliases simply support a unchangeable precocious plateau of income arsenic users switch immoderate of nan much than 2 cardinal devices successful use. However, each these bullish expectations are mostly linearly originated from nan astonishing past 2 years wherever Apple did turn its work gross and had astonishing iPhone sales.

In my opinion, aft galore bought their caller iPhone successful nan past 2 years, besides fixed nan existent macroeconomic uncertainties and definite little user liquidity owed to nary stimulus and higher liking rates, I don't deliberation Apple will negociate to support income level aliases growing. At slightest not twelvemonth aft twelvemonth arsenic nan estimates suggest.

Iphone users Apple

iPhone users worldwide (Demandsage)

If my bearish thesis proves correct, Apple banal will beryllium revalued and diminution importantly arsenic it has been nan lawsuit successful nan past wherever nan banal fell importantly each clip location was a hiccup successful revenue.

AAPL banal value humanities chart

Apple banal value 10 twelvemonth floor plan (annotations by author) (Seeking Alpha)

Apple Stock Valuation - What Happens When A Growth Stock Slows Down

The pursuing is beautiful overmuch what Wall Street is presently pricing successful for Apple stock. I person level EPS for 2023 astatine $6 followed by continuous maturation ahead. I person utilized a discount complaint of 7% and a terminal aggregate of 25.

Apple banal valuation

Apple banal exuberant valuation (Author)

(Note: PV calculates only nan dividend payout, buybacks are included into nan maturation complaint of EPS)

I find nan supra arsenic priced for perfection because to warrant nan existent price, Apple should support connected increasing without hiccups complete nan adjacent decade, nan aggregate has to stay arsenic is, investors should beryllium happy pinch a 7% return and that only if nan expectations supra are met.

Given nan cyclicality explained above, maine remembering 2016 erstwhile Apple was trading astatine a P/E ratio of 10 aliases moreover 2018 erstwhile nan marketplace was frightened astir Apple's China exposure, I deliberation nan chances of Apple gathering nan supra linear maturation expectations complete nan adjacent decade are highly slim.

If I americium much blimpish than nan market, expect a bad twelvemonth up wherever EPS drops to $4.25, which would still beryllium amended than 2020 earnings, nan coming worth of Apple banal drops to $113 implying a 25% decline. (2020 nett income $57.4 cardinal - existent number of shares outstanding - 16 cardinal - EPS connected existent number of shares = $3.58)

Apple banal valuation

Apple banal blimpish valuation (Author)

But we investors cognize that if net drop, Wall Street will commencement implementing nan short-term business into its linear models and frankincense nan valuation will apt driblet too. If nan P/E ratio drops from 25 to 15, nan coming worth drops to $70, for a diminution of much than 50%.

Apple banal valuation decline

Apple banal valuation (Author)

If I push this further, and expect an finance return of astatine slightest 10% arsenic a respectable investor should do, past nan coming worth of Apple banal drops to $54.

Apple banal intrinsic value

Apple banal worst lawsuit valuation (Author)

Conclusion

It is straightforward; successful lawsuit Apple delivers connected rosy expectations, nan banal value could deed $277 successful 10 years that, alongside nan dividend, should springiness you a return of astir 7%. If Apple's humanities business rhythm kicks in, we spot a recession and decreased spending successful general, nan image could alteration significantly, valuations would autumn and I would not beryllium amazed to spot Apple banal successful double digits sometime nan coming years. Thus, pinch constricted upside and noteworthy downside, Apple is simply a beardown sell.

This article was written by

Sven Carlin floor plan picture

Passionate astir worth investing! Education: PhD - A Real Value Risk Estimation Model for an Emerging Market Experience: Investment head astatine Let it turn investments, Netherlands Assistant professor astatine nan University of applied sciences Amsterdam, Netherlands Data interrogator astatine Bloomberg, London UK

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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