Apple the formerly magnificent
Only five of the Magnificent 7 tech stocks are performing magnificently in 2024. Amazon, Alphabet, Meta, Microsoft and Nvidia are all beating the market to a greater (Nvidia) or a lesser (Alphabet) degree. But Apple has performed very badly (down 8 per cent to the market’s 11 per cent gain) and Tesla horrendously (down 30 per cent):
Tesla’s performance may be worse, but it is not as worrying as Apple’s, from the point of view of the market. Tesla’s stock has always been highly speculative and volatile, and its valuation something of a mystery. Apple, on the other hand, was until recently the largest company by market cap (now it’s Microsoft), and it is still almost 6 per cent of the S&P 500. It is a symbol of what a tech company can be: hyper-profitable, highly stable and ever-expanding. That the stock is faltering makes one wonder whether something significant has changed in the market.
There are six plausible explanations we can think of for what is going on with Apple’s stock. Several are intertwined:
- It became overvalued. Back in December, the shares hit 32 times trailing earnings, a peak only touched a few times in the past 10 years and only surpassed in the post-pandemic giddiness of 2021. The multiple is 26 times now. For a stock that is expected to increase earnings below the S&P 500’s average pace this year and next, that’s still a lot. And at such a high share price, Apple’s dividend and its share buyback programme provide less punch.
- Sales growth is set to stay soft because of both the smartphone replacement cycle and weak sales in China. A recent report from UBS estimated that iPhone sales fell 4 per cent in February from a year ago, driven by a 9 per cent decline in the US and a 16 per cent decline in China. While Wall Street revenue estimates have been stable recently, the tone has not been great.
- The market narrative changed. The big-tech-and-falling-rates story gave way in recent months to the big-tech-and-AI narrative, and AI is an area where Apple is considered to lag Google and Microsoft.
- There has been a shift in investor preferences. For a while, many pundits — including Unhedged — talked about Apple as a “defensive growth” stock, with high barriers to entry and a big services business to carry it through the economic cycle. But with the US economy continuing to outperform expectations and fear subsiding, defensiveness may be getting less of a premium.
- As the US election approaches, China risks become more acute. Economic nationalism is on the rise in both countries. This has already hurt Apple’s sales in China, and tariffs may hit margins in the US before long.
- Legal trouble. The list is long here, but the most recent and relevant challenge comes from the Department of Justice, which thinks Apple is a monopolist and will try to force the company to tear down some of its barriers to entry.
The last threat strikes us as the least important, based on the history of legal challenges against US tech giants. We’re willing to bet that once the case has been resolved, the industry will have changed enough that the points of dispute will be less relevant to Apple’s future. Nor are we too impressed with the sales growth explanation. Revenues have been flattish at Apple for a while, but the sell-off is recent. Similarly China risk — it’s just not a new story. Valuation is never much of an explanation on its own. That leaves the rise of the AI narrative and the decline in the appeal of “defensive tech”. If those two explain the bulk of the Apple drawdown, then the stock’s relative performance may only improve when the AI hype fades a bit and the economic backdrop degrades. We are keen to hear readers’ views on this.