Lately there has been some lively discussion about Apple Inc. (NASDAQ:NASDAQ:AAPL) stock on Seeking Alpha. On the one side, many still believe that the company’s strong brand and ecosystem will provide many years of good returns. On the other side, there are those who think that the company’s stock has just gotten too expensive.
There’s some merit to both sides of the debate. On the one hand, Apple still has one of the best brands and business strategies on earth, but on the other hand, its stock has in fact gotten pricey. At today’s prices, Apple trades at 29 times earnings, 7.2 times sales and 45 times book value. Couple that with fairly tepid growth over the last 12 months, and there’s a serious case to be made that Apple stock is too expensive.
Indeed, I held that opinion until recently. My last few articles about Apple rated the stock a hold, mainly because of the valuation. Apple is without a doubt a great business, but its stock is pricey while the underlying business isn’t growing much. It looked pricey when I last covered it, especially considering that it traded at $196 at that time.
I was pretty content to leave the matter of Apple alone at that point. However, two things changed between my previous article having published, and today:
The stock price came down 8.09%.
Apple held its latest event (“Wonderlust”) on September 7, and it included the biggest refresh to the iPhone in years.
There is a serious case to be made that both of these developments make AAPL stock more attractive than it was this past Summer. The fact that the price has come down is easy enough to understand: the stock price is lower than it was in the past, therefore it is cheaper compared to its earnings power than it was back then. The point about the event is arguably more controversial, because some people think that the event was a dud.
The consensus in the financial media was that the response to the event was tepid, but other signs indicate that the new iPhones were actually quite well received. For example, the new phone being made of Titanium generated a lot of buzz, leading to many iPhone 15 videos going trending on YouTube. An example of such a trending video can be seen in the screenshot below.
The new iPhone is getting a lot of play on social media, and is seeing production delays. This suggests that demand is healthy and that the phone will sell. Whether it will sell as much as Apple expects it to is anybody’s guess, but it does not look like the company is about to see its iPhone revenue decline. In fact, the revenue could even unexpectedly grow, as Q3 will be the first quarter in the last four with a new iPhone in the picture. For this reason I consider the iPhone 15 launch to be a catalyst for Apple that could improve its stock performance in the coming quarter.
iPhone 15 – Early Signs That It Will be a Hit
Because my revised opinion on Apple stock is based partially on a catalyst, it helps to explore that catalyst in detail. As mentioned previously, not everybody agrees that Apple’s “Wonderlust” event was a hit–so I should explain why I think that it was, contrary to many other commentators’ opinions.
First, we have the reactions of the tech reviewer community. They were mostly positive. One reviewer tested the iPhone’s titanium casing and found it durable, passing a “spark” test he used to detect whether it was truly titanium. A reviewer for MobileSyrup wrote that the regular 15 was good enough to be a “pro” phone.
Third and finally, Morgan Stanley (MS) wrote that lead times for the iPhone 15 had hit record highs. Technically that could be caused by either high demand or low supply, but it’s been more than a year now since China ended its last COVID lockdown, and we’re more or less back to business as usual. It looks like high demand is the cause of iPhone 15’s rising lead times.
Apple’s Position Compared to its Competitors is Improving
Another fact to consider heading into Apple’s Q3 earnings release is the fact that its competitive position is improving. I’ve discussed the “big picture” about Apple’s competitive advantages in previous articles many times. This time, I will focus on how the company’s moat is evolving in 2023.
Apple’s market share in smartphones is holding steady. In the most recent quarter that we have data for, the company’s U.S. market share increased to 52% from 49%. It still has a commanding lead in app store revenue, bringing in $85 billion in annual revenue compared to Alphabet’s (GOOG) $49 billion.
Third and finally, Apple continues expanding its interconnected ecosystem–long thought to be one of its biggest competitive advantages–with new offerings like the Vision Pro and iPhone 15 Pro that integrate with other Apple products in novel ways.
What the Markets are Expecting
According to Seeking Alpha Quant, analysts are expecting Apple to report the following sums for the third quarter:
$89.29 billion in revenue.
$1.39 in earnings per share.
Taking a peak at Apple’s results for last year’s quarter, we can see that analysts expect revenue to decline about 1% year-over-year, and for earnings to increase 7.7%. Based on what we’ve observed about iPhone 15 demand, it looks possible for the revenue estimate to be beaten. We already know that iPhone 15 is seeing record lead times and strong demand in China: these things bode well for the phone’s ultimate sales figures. Since iPhone is the biggest single component of Apple’s revenue mix, iPhone 15 being a hit would bode well for the company’s overall revenue growth.
Risks and Challenges
On balance, I would say that people buying Apple shares today should do reasonably well. I accumulated my position at prices below $150, but I don’t think that buying that $176 would be a crazy thing to do. Nevertheless, there are risks and challenges to my thesis, including:
Antitrust risk. Because Apple has a very strong competitive position, it is somewhat vulnerable to anti-trust actions by regulators. In recent years, Apple hasn’t faced this issue as much as Google and Meta Platforms (META) have, but it was an issue for the company in the past. In 2003, Apple was ordered to pay Ireland €13 billion that the European authorities claimed was “illegal state aid.” In 2017, the issue was moved to the European Court of Justice. In 2020, Apple finally got the bill overturned, but it was a many decades long soap opera that could have cost the company quite a bit of money had things turned out slightly differently. These anti-trust actions are always a risk for big tech companies like Apple, as their massive revenues and profits make them easy targets for ambitious prosecutors hoping to make a mark on the world.
Supply chain issues. Currently, Apple does about 95% of its manufacturing in China. This is a potential risk factor for the company, because U.S.-China relations have been deteriorating for several years now. The U.S. has blocked shipments of many types of semiconductor equipment to China, and that country has responded in kind. The U.S. and China also don’t see eye to eye on Taiwan. The U.S. thinks of Taiwan as a de-facto country, while China sees it as a renegade province. Some think that there will eventually be a war between China and Taiwan, with the U.S. backing the latter. If such a thing were to occur, we’d imagine that Apple’s supply chains would be disrupted, to put it mildly,
Stagnation in smartphone sales globally. Total smartphone sales are expected to dip 6% in 2023. Apple is expected to fare better than average this year, but if its main product category is suffering, that could be cause for concern. The iPhone is in many ways the centerpiece of Apple’s famous ecosystem. Should sales start to fall then that could be a bad omen for Apple as a whole.
The Bottom Line
Taking everything into account–the company’s new products, its financials and competitive position–Apple appears to be a decently good buy at today’s levels. The iPhone 15 is likely to be a hit, and the company’s upcoming Q3 earnings release should be relatively strong. There are real risks here, of course. We aren’t in 2022 anymore; the days of snapping up all the Apple stock you could afford at $130 per share are over. Still, the stock probably isn’t a bad buy at today’s levels.