Is Apple (AAPL) Stock Facing Major Trouble Soon?

The rapid advancement of groundbreaking technologies and a significant surge in digital development have considerably heightened the attraction towards tailored hardware solutions. Yet, not all technology hardware enterprises are reaping the benefits.

Tech titan Apple, Inc. (AAPL), renowned for its history of transforming product sectors, including personal computers, smartphones, and tablets, has added another feather to its cap by being the first-ever company to surpass a $3 trillion market capitalization as of last month.

Despite being a leading consumer electronics brand consistently offering returns to its investors, AAPL has recently navigated through a volatile phase. Last month’s uninspiring earnings report led to a 2% dip in its stock prices, which now trade below the crucial 50-day moving average of $185.06, dampening investor sentiment.

Undoubtedly, several corporations and their affiliates are making strides toward significant transformations with Generative artificial intelligence (AI). However, to expand the innovative capacities of these technologies beyond the existing hype, it is paramount to impact consumers' lives in integrated ways that extend beyond launching an array of game-changing announcements.

In contrast to other firms seeking notable AI revolutions, AAPL is leveraging this cutting-edge technology to augment fundamental features in its latest devices.

The tech giant recently unveiled a new range of iPhones and a watch equipped with enhanced semiconductor designs powering fresh AI capabilities. Most significantly, these enhancements target primary operations such as managing calls or capturing superior photographs.

The tech giant has announced its pioneering entry into the AR/VR market with the Apple Vision headset, signaling the beginning of a new chapter in its success narrative. Slated for release early next year, this product will retail at $3,499.

AAPL has a commendable record of executing enormous share repurchase plans in the last decade, having invested over $573 billion in buybacks since 2012. Despite witnessing a third consecutive quarter of dwindling revenues, the company shelled out an additional $18 billion for buybacks in the most recent quarter.

However, despite such positive strides, AAPL is anticipated to encounter significant obstacles soon. Let’s delve deeper and examine the factors that could contribute to such a scenario.

Mixed Financials

Tarnishing AAPL’s image is its disappointing financial results of the fiscal third quarter, which ended July 1, 2023. Total net sales dropped by 1.4% year-over-year to $81.80 billion, largely due to a 4.4% year-over-year decline in product revenue to $60.58 billion.

iPhone sales, which traditionally account for nearly 50% of the company's total income, suffered a 2.4% setback from last year, dropping to $39.67 billion. Mac and iPad sales also fell 7.3% and 19.8% from the prior-year quarter to $6.84 billion and $5.79 billion, respectively.

On the contrary, the company's services segment boasted an 8.2% year-over-year increase, fetching $21.21 billion, contributing to the company's third-quarter profit. However, the weaker-than-anticipated iPhone sales disappointed investors.

Stretched Valuation

AAPL trades at a considerably premium valuation compared to its competitors, evident from its forward non-GAAP P/E and EV/Sales of 28.73x and 6.96x, which are 28.9% and 156.5% higher than the industry averages of 22.29x and 2.71x, respectively. AAPL’s forward EV/EBITDA multiple of 21.26 is 47.7% higher than the 14.39 industry average.

AAPL’s Recent Developments and Their Implications

Reinvestment of Funds

Despite the advent of a VR headset and the possibility of an autonomous car, the iPhone remains AAPL’s primary product and chief revenue generator. In 2022, global smartphone shipments reached a staggering 1.23 billion units, whereas the number of AR and VR devices shipped worldwide reached just 9.11 million units – a scale difference of 135 times.

In June, AAPL introduced its first major product since 2014, the Vision Pro, an AR headset priced at $3,499. Despite signaling an expansion into new tech landscapes for the company, industry analysts predict that this new offering is unlikely to impact its revenue needle for several years. It is expected to generate annual revenue of over $20 billion by 2037 – more than a decade away.

Meanwhile, the company has spent tens of billions of dollars developing this product. Some analysts believe that Vision Pro production and shipments are expected to be “quite small” for 2024, having negligible benefits for AAPL stock price.

If the company had halved its share repurchases over the past decade, it would have had an additional $250 billion in investment capital, potentially leading to an even superior product at this stage.

iPhone Ban

China has proven instrumental to AAPL's growth and expansion. Over 95% of AAPL's globally acclaimed products – iPhones, AirPods, Macs, and iPads - are manufactured in China. AAPL’s CEO, Tim Cook, cited China's proficient skill sets as a compelling reason for this reliance on Chinese manufacturing.

In the fiscal year 2022, revenues generated from China reached $74 billion, accounting for roughly 19% of AAPL's total earnings. Greater China segment sales accounted for 20% of AAPL’s third quarter sales in 2023, and its Greater China sales rose 7.9% year-over-year to $15.76 billion.

However, the growing geo-political tension between the United States and China represents potential challenges for AAPL. The Chinese government recently banned using iPhones in workspaces, citing security issues, marking a new chapter in the ongoing trade and technology conflict between the world's two biggest economies.

Nikkei reported that some state-owned entities have prohibited employees from bringing any AAPL devices into their work premises, particularly those with access to trade secrets. Consequently, this move, seen as minimizing security risks tied to AAPL's gadgets, caused AAPL's market capitalization to shrink by over $200 billion within the last week.

In terms of iPhone shipments, China surpassed the U.S. as the largest single market in the second quarter of 2023. This trend persisted in the third quarter with a noteworthy surge in iPhone net sales in Greater China.

Some predict that the government restrictions may not significantly impede AAPL's sales but could signify forthcoming issues for the company in China, which ranks as the world's second-largest economy. The uncertainties surrounding AAPL’s future manufacturing and sales in China have sent its stocks spiraling downwards.

The recent launch of the iPhone 15 series has garnered mixed reviews among Chinese consumers. Some critics have highlighted the lack of groundbreaking new features and unfavorably juxtaposed the latest iPhones with Huawei’s 5G Mate 60 Pro and Mate 60 Pro+ models, which feature advanced Chinese-manufactured processors.

Despite the perceived lack of hardware upgrades, AAPL continues to deliver an unmatched user experience that makes transitioning to Android devices less appealing for users. Experts remain confident regarding AAPL’s dominance in the over-$800 smartphone segment. Although Huawei's re-entry into the 5G phone market may imply some level of competition, the company's ongoing supply chain problems could limit its overall sales appeal.

M&A Activity Could Escalate AAPL’s Innovations

Rising interest rates yield gains for cash-loaded enterprises such as AAPL. However, they pose significant challenges for burgeoning technology firms that hinge on financing for their growth and prosperity.

One critique leveled at AAPL is the waning innovation. Excluding advancements in camera technology, AAPL's lineup has been lacking groundbreaking technological leaps in recent years.

The current monetary policy landscape could induce a spike in mergers and acquisitions within the tech arena. AAPL's substantial cash reserves render it a probable suitor for tech firms, potentially fueling its growth and innovation via successful, value-adding acquisitions.

Lack of Strategy for Generative AI

Data in today’s world has emerged as a vital asset, and Generative AI is leveraging it to drive unprecedented innovations. The rise of Gen AI could mark a seismic shift in the industry, potentially transforming market dynamics by allowing for novel product creation and cost reductions. AAPL could face formidable challenges as the tide turns toward this new technology.

AAPL's vulnerable position can be attributed to its need for a robust strategy centered around GenAI and Large Language Models (LLMs). LLMs drive services like ChatGPT; without incorporating them, AAPL's leadership in the tech space may be threatened.

As AI continues to burgeon, AAPL risks being surpassed by three powerhouse players—Microsoft Corporation, Alphabet Inc., and Inc.—all of which boast more established footholds in the rapidly expanding AI sphere.

The delay in AAPL's development of a computing platform implementing cloud-based LLMs has resulted in the company trailing slightly behind its competitors. The challenge of catching up is compounded by customers' hesitancy to change providers due to the necessity of reprogramming their existing models.

Meanwhile, relentless competitiveness marks the landscape as companies like Amazon and Microsoft persist in unveiling new AI solutions. These advancements are anticipated to strengthen their AI division’s revenue, reinforcing their position and assertiveness within AI development.

Mixed Outlook

As the company looks toward the fourth quarter, it anticipates a deceleration in total revenue, with both Mac and iPad projections showing double-digit declines.

For the fiscal year ending September 2023, Analysts expect AAPL’s revenue and EPS to decline 2.8% and 0.8% year-over-year to $383.33 billion and $6.06, respectively.

However, for the first quarter ending December 2023, its revenue and EPS are expected to increase 5.3% and 11.6% year-over-year to $123.31 billion and $2.10, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters.

Wall Street analysts expect the stock to reach $207.39 in the upcoming 12 months, indicating a potential upside of 18%. The price target ranges from a low of $167 to a high of $240.

Bottom Line

Despite AAPL stock dipping 2.1% over the past month, its year-to-date gain holds steady at an impressive 35.3%, closing its last session at $175.74.

The tech behemoth securely holds its footing within China's high-end smartphone market. However, it is anticipated to experience growing competition from domestic brands such as Huawei, which continues to enhance offerings with progressive upgrades. Additionally, lackluster initial iPhone 15 sales could present a challenge for the company.

AAPL remains profitable, although the emerging GenAI might cast a shadow over the tech deity. Fresh industry players could leverage LLMs, thereby revolutionizing the entire sector.

Moreover, given the strained relations between the United States and China, vital to AAPL’s manufacturing and market strategies, and AAPL’s potentially stretched valuation, investors should wait for a better entry point.