My main coverage in the past couple of years has been Chinese American Depositary Receipts [ADRs] as I reckoned my frequent travels to China (before the COVID-19 pandemic struck) enabled me to provide the on-the-ground perspective. Hence, I believe the majority of my followers on Seeking Alpha became acquainted with my writings on Chinese companies like Alibaba Group Holding Limited (BABA), JD.com Inc. (JD), and Baidu, Inc. (BIDU).
However, Apple Inc. (NASDAQ:AAPL) is among my earliest stock coverage. Apple: The India Story Says It All and Apple In India: The Force Awakens, both written in early 2017, were my first two articles on the iPhone company. AAPL stock has had a total return of 358% since the publication of the first article, though admittedly, we were in the middle of a very strong bull market uptrend.
My last article on AAPL stock was Apple Vs. Tesla Stock: Which Is A Buy Now published on 7 May 2021, just over a year ago. AAPL stock has only returned a mere 5.8% since, while Tesla, Inc. (TSLA) is flat after a recent swoon masked the fresh highs TSLA stock made over the past year. Tesla is 46% off its all-time-high [ATH] established in November 2021 while Apple is better off, down 24% from its ATH achieved earlier this year. However, this decline is still considered rather significant for a stock often touted as a “no-brainer” investment (as a search on Google would reveal).
AAPL shareholders who bought before 2020 are still doing very well on paper. Those who invested in early 2020 are in profit too, while those who bought in 2021 may be feeling jittery and those who got into AAPL stock only this year are likely wishing they had not. How many shareholders bought Apple shares after having been convinced that the stock is a “no-brainer” investment, that it’s a matter of time your AAPL holding turns profitable given that historically, AAPL stock had scored fresh highs after a period?
If it is any consolation for Apple shareholders, the broader market is also having a bad time, and shareholders of another oft-mentioned “no-brainer stock”, Amazon.com Inc. (AMZN), are seeing their AMZN holdings down 35.5% year-to-date, more than the 22.5% decline suffered by AAPL stock. The share price of Alphabet Inc. (GOOG) (GOOGL), the parent of Google, is down 24.4%, slightly more than Apple.
Ironically, Baidu Inc. has outperformed AAPL stock year-to-date, even as Chinese ADRs are supposedly finding it tough to regain investor favor given the economic slowdown in China amid the country’s strict adherence to its “dynamic COVID-zero” policy and the successive additions of companies to a list of organizations facing possible delisting from U.S. exchanges under the HFCAA.
Given that a typical American portfolio that has both Apple and Chinese ADRs is likely to have a much larger weighting of AAPL versus the latter which may include BIDU, the sting from the current downdraft could be several times that of the losses from Chinese ADRs. Thus, the myth that an investment in AAPL stock is a “no-brainer” is debunked, at least when done so in the past months. BIDU shareholders who listened to the chorus of “advice” telling them to dump Chinese BIDU stock for AAPL are finding themselves in a worse position.
AAPL Stock Key Metrics
Among the FAANG stocks, AAPL has the second highest price-to-earnings [PE] ratio after AMZN (which has an outlier PE ratio and thus is not shown in the following chart) at 22.3 times. Meta Platforms Inc. (FB), the parent of Facebook, Netflix Inc. (NFLX), and Alphabet have lower PE ratios between 14.6 times to 19.7 times. On a forward 1-year basis, the PE ratio of Apple will dip to 21.1 times, while the others see their PE ratio compress further to between 13.8 times to 16.3 times, accentuating the contrast with Apple.
In terms of price-to-sales [PS] ratio, AAPL stock is also leading the pack at 5.9 times, while FB, NFLX, and GOOG have PS ratios between 2.8 times to 5.4 times. On a forward one-year basis, the story remains the same, with Apple having the highest PS ratio among the quartet.
Despite the higher PE and PS ratios, investors like Apple for a myriad of reasons, including the notion that it’s cash-rich. However, some investors may have forgotten or are not aware that Apple’s Chief Financial Officer Luca Maestri had in 2018 announced the intention for the company “to become approximately net cash neutral over time.” Currently, among the quartet compared, Apple is relatively “cash-poor” while Alphabet is heavy on cash ($121 billion net cash).
Fortunately, Apple executives did not squander the money. They have been using Apple’s cash hoard on share buybacks and dividend payouts. Apple Inc.’s shares outstanding reduced from nearly 27 billion in 2013 to around 16 billion by early this year. The total dividend paid on a trailing-twelve-months basis has reached $14.7 billion. However, shareholders should not be expecting to eat the cake and have it too. Either Apple has loads of cash on hand or it conducts share repurchases and gives out dividends.
Sure, Apple is a money-making machine. It is oozing free cash flow [FCF]. However, its rich valuation means that on a price-to-FCF basis, it is comparable to Alphabet Inc. and is more “expensive” than Meta Platforms Inc. Nonetheless, Microsoft’s (MSFT) price-to-FCF of 30.0 times makes Apple’s 21.6 times look more favorable.
AAPL Stock Ratings
Despite the steep drop from the peak, Seeking Alpha’s quant system has not found AAPL stock appealing yet. The quant rating for Apple stock is “Hold” with the factor grade for valuation remaining at a dismal F grade, the same three months ago when the share price was much higher. Profitability is still a highlight, maintaining its A+ grade for months. Momentum and revisions are showing signs of deterioration, falling back from A and A- grades to B+ and B- respectively.
The grade decline for revisions can be seen from the 26 downward revisions for EPS (versus only three upward revisions) and the 20 downward revisions for revenue (versus five upward revisions), both over the last three months (as of 21 May 2022, according to the Seeking Alpha AAPL symbol page). I’m surprised, though, that with the large number of revisions, the actual changes in the revenue and EPS estimates over the last three months for the next three reporting quarters are only down 1.6-3.7% for revenue and 1.7-6.7% for EPS. With the headwinds, I was thinking of double-digit percentage changes.
Could Wall Street analysts lower their forecasts further before Apple Inc. reports its next earnings? Downward revisions may exacerbate the bearish sentiment. However, Apple has a steady record of delivering results that surprise on the upside. If the estimates are lowered, the company has a better runway to delight the market. Otherwise, in this unforgiving market climate, shareholders would have to be prepared for the gap down in the share price if Apple misses – especially for the first time in years. Even in September 2021, it managed to scrap through with a narrow 0.17% positive surprise.
Currently, Wall Street is still in love with Apple, having it as a Buy, albeit with a score of 4.38, lower than AMZN and GOOG (4.64 and 4.71 respectively). That is even lower than the embattled Chinese internet giant Alibaba Group Holding Limited which has a Strong Buy with a score of 4.55. AAPL stock is, however, deemed a “better buy” than FB and NFLX stocks, with the latter garnering only a Hold from analysts.
Despite the swoon in AAPL stock, analysts remain steadfast in their price targets on the company which was just weeks ago the highest market capitalization in the world. The current consensus price target on Apple Inc. is $189.07, just slightly lower than the all-time-high consensus price target established in February.
Although the share price of Apple Inc. has fallen significantly from its peak, the most bullish analyst calling for a price target of $226 since early January has yet to budge. Interestingly, the most bearish analyst which set the price target floor of $130 in February has also not revisited his call, even as AAPL last traded just $7.59 above this target.
Apple’s Ethical Gray Areas May Turn Investors Away
I believe Apple remains fundamentally very solid even with the near-term headwinds like the Russia-Ukraine conflict, ongoing supply chain challenges due to the dynamic COVID policy in China, and inflationary pressures. However, with market players seemingly looking for an excuse to trigger a sell-off, I’m afraid bears would drum up attention regarding the ethical issues facing Apple Inc.
On Thursday, Apple was reportedly accused of union-busting for the second time, this time at the company’s Grand Central Terminal store in New York. Earlier in May, the press received a memo Apple sent to several of its U.S.-based stores threatening the loss of opportunities and promotions should employees push for unionization.
On Friday, investment firm Wedbush Securities noted that checks showed the iPhone supply chain had been “surprisingly resilient” despite China’s COVID-related lockdowns. However, he neglected to mention that this resilience was the result of Apple suppliers instituting a “closed loop” system, whereby workers live, work, and sleep on the factory premises. This sounds like the perfect plan to avoid COVID-19 infections and ensure Apple customers continue to have our iPhones and iPads. However, it has seemingly resulted in stress among the employees.
A couple of weeks ago, videos posted on social media showed over a hundred workers from Quanta, a key Apple supplier, wrestling with security guards in hazmat suits and vaulting over factory gates to escape. Should this phenomenon become more prevalent, human rights activists may start questioning Apple and make demands. The negative press may be detrimental to AAPL’s share price.
Over the past year, Apple suppliers had also allegedly used forced labor in China. While the revelation is not new, we are in a more sensitive investing environment. Just like the password-sharing issue is not new to Netflix, but it is hyped as a major problem currently for the video-streaming company. China is a big market for Apple. If push comes to shove, it may have to choose between offending the international community or the Chinese consumers. Either way, the damage will be substantial.
Employee And R&D Expenses May Jump
Consumers are feeling the heat from inflation. Apple employees are also consumers and there are 154 thousand of them. In February, Apple reportedly raised the pay for many of its U.S. retail employees. In March, Bloomberg reported that select engineers received up to $200,000 in stock-based bonuses. Although not all are entitled to the generous stock reward, now that the move is widely reported, those not among the recipients are going to demand higher compensation or they may leave for another company that pays them better.
Apple suppliers hire millions of workers that are likely to expect some wage raises to cope with inflation too. The higher expenses may find their way to Apple. The consolation here is that Apple hires fewer direct employees than Alphabet and Microsoft, which have 164 thousand and 181 thousand employees respectively.
However, the employee count at Apple Inc. has grown steadily over the past few years. If the trend continues, the wage cost is going to keep rising and potentially become a larger proportion of the revenue if its sales growth slows down.
Apple Inc.’s Research and Development spend relative to its revenue is a low 6.3%, and has been lower than Meta Platforms, Netflix, and Alphabet Inc. for years. Should Apple want to accelerate its Apple Car project, invest in metaverse R&D, and defend its core products from the stiffer competition, R&D expenses could balloon.
Is AAPL Stock A Buy, Sell, Or Hold?
Apple products are in the premium pricing category. Yet, not only consumers who can well afford them are buying. There are plenty who borrow by whatever means to pay for their beloved iPhones, iPad, Air Pods, etc. In a rising interest rate environment, these consumers may fail to keep pace with their repayments. Lenders are also becoming more cautious of defaults and increasingly selective over who they lend their money to, constraining the pool of consumers who can afford Apple products. The collapse in the share prices of many tech stocks and cryptocurrencies has also made the big swathe of nouveau riche tighten the purse strings, not to mention the broader market’s weakening consumer confidence.
Furthermore, this means that Apple may find the strategy of raising the prices of its products to cover inflation a more difficult task than in the past when it could rely on its strong brand cachet to push up prices and still see consumers clamoring for its new offerings. Given Tim Cook’s proven execution capabilities, the above-mentioned headwinds and challenges could prove ephemeral.
Nevertheless, if AAPL stock is sold off while others have not, there may be a strong case to say market players could have overreacted. However, as investors know very well with our investment portfolios in a sea of red, the entire market, and the tech sector especially, is under a lot of selling pressure. Investors have transitioned from FOMO (fear of missing out) to SON (staying out now). Hence, I believe AAPL is a “Hold” at this point.