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My last article on Apple Inc. (NASDAQ:NASDAQ:AAPL) was published in early February this year, and at the time I argued that one should avoid a long position in this stock. The reason was simple: the multiple was too high relative to the underlying growth. At the time, the P/FCF multiple was around 29x, sales in China were deteriorating, and the only source of the next wave of growth was Vision Pro, which in my opinion essentially lacks mass market traction. However, I also highlighted the danger of shorting Apple from two aspects: (1) AAPL’s inclusion in the Magnificent 7 and all major stock indexes, where passive flows don’t care much about multiples, and (2) the company’s cash balance combined with its strong free cash generation profile.
On a year-to-date basis, Apple has delivered returns in line with the market as measured by the S&P 500 and Nasdaq-100. In fact, all of Apple’s positive returns have come since early May, when management announced a historic $110 billion share repurchase program.
Y Chart
From a valuation multiple perspective (P/FCF), APPLE has become an even more expensive stock, with the metric rising to a 10-year high of around 34x P/FCF.
Y Chart
This P/FCF level could easily be considered very high, and by definition, investors would need a robust growth trajectory to compensate for going long such an aggressively priced asset. Furthermore, in theory, one needs to consider that the current growth outlook would have to be very strong to justify all of this, considering Apple’s stock is trading at a 10-year high (from a valuation perspective), iPhone sales in China are booming, and interest rates are higher than they were when they were extremely accommodative.
Let’s take a look at some key data points that have emerged since we published our last article on AAPL to determine whether now is the time to buy.
Thesis Review
In our last article, we highlighted the slowdown in China, one of Apple’s key markets. Furthermore, sales growth in other regions was negligible, barely offsetting the decline in China. As such, the last quarterly earnings report revealed just 2% sales growth year over year.
Now, if we look at the latest 10-Q report (March 30, 2024), we can see that revenues are actually down about 4% compared to the results from April 1, 2023. The primary driver of this negative trend was primarily iPhone revenues, which declined by about 9%. Of all product categories, the iPhone is the most significant, not only from a revenue perspective, but also due to its inherent properties of serving as a key vehicle for generating cross-sales for AAPL’s other products.
In the context of AAPL’s revenue generation dynamics, it’s also worth highlighting the fact that it’s not just the China region that’s struggling, but in fact the entire Asian continent theoretically embodies the greatest growth prospects (especially compared to mature markets such as Europe and the US).
AAPL Quarterly Report, May 3, 2024
One of the big hopes for AAPL right now is India, which has seen strong sales growth and could gradually become a very important market for the company: Revenues in India, for example, grew about 33% (to about $8 billion) in the 12 months ending in March from $6 billion a year earlier.
However, if you take a step back and look at the absolute numbers and the momentum of the current sales downturn, we expect India to contribute a few percentage points to overall sales, mainly offsetting the decline in sales in other regions.
Speaking of sales potential, we need to look at Vision Pro, which was theoretically expected to be a major catalyst for AAPL’s sales growth. While we don’t have concrete sales data for this particular product, it is clear that the launch of Vision Pro has only marginally increased sales. In fact, Vision Pro has not recorded 100,000 unit sales in a quarter since its US launch, and domestic sales for the current quarter are down 75%. AAPL has attempted to bolster the product with additional market launches and upgrades to visionOS 2, but still, we find it difficult to see it gaining the momentum in the market needed to make a difference in AAPL’s total sales.
Apart from the Vision Pro investment, the company has decided to shift its focus to AI (e.g. AI-specific chips) to take advantage of the opportunities that lie ahead there. At this point, it is hard to predict how successful this sector will be for AAPL, but I would never buy the thesis that AAPL deserves to trade at such a high premium because of this AI potential. In my view, the key issue for AAPL is monetizing its AI investment and convincing its customer base to pay even higher prices for some of its products because of the more expensive AI-enabled chips. Here, one must keep in mind the competition from other players and the motivations of customers to pay higher prices for premium AI solutions. Now, I am not saying that AAPL’s sales will not rise as a result of its AI investment, but I do wonder whether sales will be high enough to justify its aggressive multiple.
Finally, we must also consider the significant announcement of a $110 billion share repurchase program. On the surface, this looks like a significant driver of shareholder value. However, in my opinion, there are two aspects of this activity that make it less material to an investment decision.
While the $110 billion share repurchase package is substantial in absolute terms, it does not play a significant role in the context of AAPL’s market cap of approximately $3.4 trillion (i.e., approximately 3% of its current market cap). This move will result in AAPL significantly reducing its liquidity reserves, which means two things: (1) less income from financial investments, and (2) a reduction in strategic funding, which was considered one of AAPL’s primary sources of funding for future growth (e.g., by embarking on large acquisitions).
Conclusion
Overall, AAPL is a healthy business with a strong cash generation profile that allows management to announce significant share repurchases while maintaining its growth plans and keeping its financial profile strong.
But the problem is that the multiple is too high and seems to continue to climb, despite stagnant growth and unclear growth potential. With a P/FCF multiple of around 34x, you’d need to be talking about sustained double-digit growth, which is clearly not the case at this point. While there are some opportunities (India, Vision Pro, AI offerings, etc.), none of them are strong enough or embody the right outlook to offset sluggish demand in Asia and fuel AAPL’s double-digit sales growth engine.
As a result, I still maintain a conservative stance towards Apple.
