Is Apple undervalued or just losing its shine?
The May 2 earnings release may give investors a clue
Apple has long been a stock market darling, sporting the world’s largest market capitalization until its recent slip to second place behind Microsoft but still valued by investors at over $2.5 trillion. But Apple’s success has always been a one trick pony, basically an annuity akin to a religion earnings outsizied profits by “tithing” its cult-like customer base with an upgrade scheme that prompts iPhone users to buy a new and arguably over-priced smartphone about once every three years to gain almost imperceptible improvements in phone features or performance.
What has distinguished Apple for years is customer loyalty, not innovation. Apple attempt to develop an electric vehicle (EV) is now abandoned and its virtual reality headset is an expensive device attractive pretty well only to devoted Apple nerds.
Apple remains a Bank of America top pick despite recently soft stock prices.
Apple relied on China for growth as its domestic market sales reached such a high penetration that share gains in the United States seemed a distant hope, but the bloom is off the rose in China with the latest estimates by Counterpoint showing iPhone sales down 24% in the first quarter of 2024 and market share tumbling in China to third place and at risk to becoming sixth place as domestic Chinese rivals keep attracting more customers.
Apple reportedly sold 68 million iPhones in United States in 2023 and approximately 47 million in China, together comprising 50% of the 232 million iPhones the company sold in 2023. On average an Iphone costs about $558 for Apple to build but sells for about $988 on average, contributing ~$100 billion to Apple’s profit margin which totaled $169 billion in 2023.
Weaknesses in the growing China market hurt Apple. 2024 unit sales in China seem on track to fall to 43 million and the loss of 4 million units implies a loss of $1.7 billion gross margin, a decline of about 1% other things equal.
Does a tech giant paying a less than 1% dividend warrant a price to earnings multiple of 25 times if growth has stalled or even stopped?
It may be time for funds to lighten up on the exposure to Apple stock. The May 2, 2024 earnings release and guidance may tell the tale but many investors may decide the risk of waiting for the news is greater than the benefit.