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Apple: iPhone 14 sweetening request (NASDAQ: AAPL)

Apple flagship store in New York

hapabapa/iStock Editorial via Getty Images

With signs of slowing demand for the iPhone 14 in the first few weeks after launch, we believe the financial estimates are far too optimistic for Apple Inc. (NASDAQ: AAPL). I await analyst estimates for 2022 and 2023 will begin to descend in the coming weeks to reflect reality. Additionally, with the stock still trading near 25x Fwd P/E, a high level by historical standards, I believe the stock price has a substantial downside. I would recommend investors stay on the sidelines.

China loves the apple

A few days ago, I read an interesting article in a Chinese business-oriented blog about the rapidly cooling scalping market for the new iPhone 14.

First, a brief introduction for those unfamiliar with the scalping market. Since the introduction of the iPhone 4 and 5 models a decade ago, there has been an informal gray market in the scalping of new iPhones in Hong Kong and China. Upon initial release, resellers would buy tens to hundreds of handsets and then resell the devices for a few hundred RMB/HKD. At the height of the frenzy, some scalpers reportedly made more than RMB 1 million per month in profit by scalping iPhone 6s at margins of RMB 5,000-6,000.

The presence of these scalpers is why Apple often signals a shortage of devices when they release a new model, because the scalpers have literally paid people to wait in line and get the devices for them.

Scalpers selling devices at a discount

Fast forward to iPhone 14, and it looks like life hasn’t been good for scalpers. According to the businessfocus.io article, since the launch of the iPhone 14 two weeks ago, scalpers have been hoarding devices in hopes of snagging a bargain in the price markup. However, in recent days, scalpers have been polled looking for a 100-500 RMB discount to MSRP to unload their inventory, as sales have stagnated.

In fact, if you Google the key terms (translated as “Apple 14 sold at 100 off”), you will find many mentions on Chinese social media of resellers selling their iPhone 14 at a discount (Figure 1). .

Sell ​​an iPhone 14 at a reduced price

Figure 1 – Google search for discounted iPhone 14 sale (author created using Google)

Apple Rumored to Abandon Plans to Increase Production

On the night of September 27, Bloomberg News reported that Apple had asked its suppliers to drop their plans to increase production to 6 million units in the second half of 2022. Instead, Apple plans maintain handset production at 90 million units. This essentially confirms the weak demand that was noted in the businessfocus.io article.

Financial estimates too rosy?

Currently, financial analysts expect Apple to achieve mid-single-digit (“MSD”) revenue growth, increased EBITDA margins in fiscal 2022, and MSD EPS growth (Figure 2).

AAPL estimates

Figure 2 – Apple Consensus Estimates (TIKR.com)

I think these estimates are far too optimistic. First, if we look at Apple’s June 30, 2022 9-month financial results, we see that much of the year-over-year growth came from iPhones and services, which combined for $18.6 billion. dollars on the $21.7 billion year-over-year growth.

Cumulative sales in Q3/2022

Figure 3 – Apple Q3/2022 year-to-date sales by category (Apple Finance Q3/2022)

If we now assume stable growth in handset volumes (according to the Bloomberg article), and given that handset prices are stable in the US and China, it is difficult to arrive at consolidated growth of MSD for the company.

Additionally, with labor and materials inflation soaring, it’s hard to understand how analysts continue to estimate an expanding margin for Apple. Referring to Apple’s financial summary for the third quarter, we can see that although revenue increased by 7.7% to $304.2 billion, R&D expenditure actually increased by 21.1% YoY and general and administrative expenses of 14.0% YoY (Figure 4). At some point, if growth slows to low single digits or worse, and spending continues to grow at a healthy pace due to inflation, we should start to see margin compression.

AAPL Q3/2022 Financials

Figure 4 – Apple Financial Summary Q3/2022 YTD (Apple Finance Q3/2022)

Apple gets an F for the rating

While Apple is a great company and continues to produce products that consumers love, the valuation multiple is nothing short of outrageous. Seeking Alpha’s valuation tool gives it an “F” on the valuation, with Apple shares trading at a P/E Fwd of 24.9x, well above the sector median at 16.9x.

F for valuation

Figure 5 – AAPL rating gets an F (seeking Alpha)

Valuation Multiple Extended Vs. History

In fact, this has not always been the case. If we look at Apple’s historical valuation, we can see that before the COVID pandemic, Apple’s Fwd P/E multiple hovered around 15x, which is understandable for a company that only grows at rates of MSD growth.

Historical AAPL Fwd P/E Stretched

Figure 6 – Historical AAPL Fwd P/E stretched (TIKR.com)

However, the COVID pandemic supercharged valuations and Apple traded up to 35x Fwd P/E. As the Fed continues to raise interest rates, we think it is very likely that valuation multiples will compress across all sectors and industries. If Apple simply returns to the upper end of the previous range, 20x Fwd P/E, we could be looking at a significant drop in stock prices. Based on the consensus EPS estimate of $6.10/share, 20x Fwd P/E would argue for a stock price of $122.

Conclusion

With signs of slowing demand for the iPhone 14 in the first few weeks of launch, we think current financial estimates are far too optimistic for Apple. I expect analyst estimates for 2022 and 2023 to start falling in the coming weeks to reflect reality. Additionally, with the stock still trading near 25x Fwd P/E, a high level by historical standards, I believe there is a substantial downside to the stock price. I would recommend investors stay on the sidelines.

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