Apple (NASDAQ: AAPL) has been a shining star in the eyes of investors, demonstrating an impressive 435% surge in its stock over the last five years, with a remarkable 46% ascent in 2023. However, the euphoria seemed to wane as we stepped into 2024, witnessing a 3% slip in its shares within a few trading sessions. The looming question now is whether this is a temporary setback, presenting a potential ‘buy-the-dip’ moment, or the harbinger of a challenging year for shareholders.
Assessing the Divergence of 2023
Typically, the market’s valuation of a stock is heavily influenced by the growth prospects of the underlying business. In the case of Apple, the price-to-earnings (P/E) ratio and analysts’ expectations of the company’s long-term earnings growth tend to move hand in hand. However, in early 2023, these metrics began to diverge. While the stock soared exponentially, analysts adopted an increasingly pessimistic outlook towards Apple’s future earnings growth.
Such disparities between valuation and market expectations are unsustainable and usually indicate a misjudgment. This disconnect suggests that either analysts are unduly pessimistic about Apple’s future or the market’s expectations are overly optimistic. Ultimately, this dissonance will be resolved, revealing which side was correct. The risk of investing in Apple stock currently lies in potentially aligning with the wrong side of this chasm.
Unveiling the Fundamental Story
Despite its stature as a $3 trillion company, Apple’s business model remains straightforward. It retail prominent hardware products, with the iPhone as its poster child, and offers a range of subscription services including cloud storage, video, news, games, and music. In its fiscal 2023, Apple raked in $383 billion in total revenue, with approximately 78% stemming from products and the remainder from services.
Presently, there are over 2 billion active Apple devices worldwide, a noteworthy feat given its premium pricing. Nonetheless, sustaining growth is proving to be an uphill task. The company’s innovation cycle is slowing as the smartphone market approaches maturity, and product updates are becoming less frequent. While the transition from 4G to 5G networks provided a temporary fillip, Apple’s revenues have plateaued over the past couple of years.
Notably, Apple boasts an unparalleled free cash flow approaching $100 billion over the past year. This financial strength has been leveraged to aggressively repurchase its own shares, driving a reduction of over 17% in the number of outstanding shares over the last five years. However, this zealous buyback program has been accompanied by an increase in long-term debt, exposing the company to potential risks. While Apple’s financial position remains robust, the sustainability of adding more debt for repurchases is questionable.
Ruminating on the Future of Apple Stock
Predicting the short-term trajectory of a stock is an uncertain endeavor. Nevertheless, a company’s fundamental underpinnings can provide a compass for investors. Currently, Apple’s stagnant revenue growth and the possibility of a slowdown in share repurchases help explain the tepid sentiment among analysts. With a P/E ratio of almost 30, the stock appears expensive if Apple’s earnings grow at a modest 9% annually, yielding a Price/Earnings to Growth (PEG) ratio exceeding 3. A prudent approach would be to adopt a wait-and-see stance, cowing to the stock until either Apple’s earnings growth surpasses expectations or its valuation reverts to a more realistic level for a slower-growth company.
Before considering an investment in Apple stock, investors should ponder the aforementioned factors shaping its outlook. The nuances of Apple’s business dynamics and the ever-shifting market sentiment warrant careful evaluation before making any investment decisions.