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Investment Thesis
apple (NASDAQ: AAPL) is primed for a sell-off. Not from its own doing, but because the global economy has slowed down. I highlight examples of companies that illustrate how the near-term macro outlook has weakened expectations.
I then remind readers of the global cost of living crisis, which leads us to pay attention to Europe.
Next, I explain how the Wall Street game is played and how it should be thought of as a passive shareholder.
Also, I emphasize how paying more than 20x forward earnings for a company growing its bottom line at close to 6% to 7%, does not give investors a margin of safety.
Finally, this is not a hard-sell article. But I hope to bring some thought about the underlying issues facing Apple to your attention before it’s too late.
Companies Shed Light on Their Vision
Over the past few weeks, we’ve seen companies with their fingers in the macro environment announce that things have slowed down. I’m not talking about small shops making bearish calls to make a name for themselves.
I am referring to global companies that want to do everything in their power to ensure that their stock remainsbut had to mitigate the slaughter of their stocks by taking the Street first.
For example, FedEx (FDX) recently noted that it experienced weak macro and was forced to withdraw its fiscal 2023 forecast, saying,
Global volumes declined as macroeconomic trends worsened significantly later in the quarter, both internationally and in the US.
FedEx is an example of a company with insights into global logistics and how things actually work on the ground.
Another company that recently acknowledged that things in the near term are difficult is Nvidia (NVDA), which mentioned in a conference that the company will in the near term witness an oversupply.
We immediately took action to also pay the price programs to move this inventory.
Semis are a leading indicator of macro demand. Although Nvidia says that next year things will be better.
Next, Ford (F) describes some of its supply chain problems as about 40K vehicles are missing parts, forcing the company to revise its guidance for the next quarter. Although Ford felt it could beat it and hit its full-year guidance for the year.
Next, ArcelorMittal (MT) describes how weak demand for steel combined with very high energy costs in Europe has caused the company to idle some of its plants.
These are uninspired comments intended to stir up controversy. I am confident that you will agree that the selection I have mentioned is broad and represents the underlying reality of what these different sectors face.
But what does this have to do with Apple?
Global Cost of Living Crisis
Actually, one way or another, the Fed has to cool the US economy. And I’m in no position to speak out of my depth about whether or not the Fed will succeed in its soft landing.
What I can easily see from the countless companies I follow is that demand is falling rapidly. There is softness everywhere. Even in unexpected places like ServiceNow (NOW) whose platform is used by 50% of the Fortune 500 global blue chips. ServiceNow customers are the blue chips, with the most financial resources. However, ServiceNow sees its sales cycles.
Next, Alphabet’s (GOOG)(GOOGL) advertising revenues are also affected. As companies scale back their advertising spending due to the uncertain outlook facing their business.
Meanwhile, consumers around the world have to accept high inflationary pressures along with rising energy costs. And this is particularly felt in Europe.
Apple’s 10-Q
As you can see above, Europe was until the last quarter a positively contributing on Apple’s revenue growth rates. And now, 22% of total revenue will be a drag on Apple’s topline earnings.
Apple Stock – Don’t Fall for the Wall Street Game
Moving on, most analysts who follow Apple have a buy or strong buy rating on the stock.
Yahoo! AAPL
This ensures that the analyst house gets access to Apple’s C-suite executives. And they feel the whole supply chain. In essence, there are many indirect benefits of having a buy rating on Apple stock.
Having an underperform rating on Apple stock is a proxy for a sell rating. And that doesn’t open any doors to analysts.
Therefore, when expectations are so high, where can the stock seriously go from here?
Apple is already priced at roughly 24x forward earnings. there really is there’s no way to stretch much moreIn my opinion.
In fact, even if Apple matches analysts’ expectations, you won’t get more than a 20x multiple on your earnings, when the company’s bottom line is growing at a mid-single digit CAGR.
No matter how good a company’s business is, no business lasts forever.
So What’s the Takeaway Here?
The easiest thing to do in investing is to say that everything is going to be okay and lie back and relax that one is a long-term investor. A buy-and-hold forever investor.
After all, there is good reason to stay with Apple. Especially since this is one of the few areas left in the market that is still relatively untouched by the bear market.
Also, let’s be honest. For many readers, they’ve been hearing about the tech disfavor for more than a year, and since their holdings in Apple have showed no weaknessthere is a belief that Apple will somehow achieve, as it has done so far.
So what do I advocate? To sell all your Apple stock? no, that’s not what this is about. I can’t predict how things will turn out for Apple. But I believe that the probability of success from this point is small.
Apple is the last general that still remains in this market. And with so many passive ETFs forced to buy Apple, it means the stock has succeeded in chugging along. Incidentally, note that 7% of all passive S&P500 ETF purchases go to support Apple’s share price.
And that has been great for Apple holders. But the pieces of the puzzle are now coming together, which will make Apple’s next quarters fall short of expectations.
And when that happens, the stock will sell off. And when the selloff begins, there will be a large number of institutions that want to hang on to their Apple gains, especially in their harvest. losses elsewhere in their portfolio.
The next group will begin to rethink their own position. In fact, while the share price remains strong, no one is asking the hard questions about their investment. It is only when things go south, that investors ask tough questions.
And then ETFs are also gaining momentum. So what is my point? My point is this, doing nothing is an active choice! And it may not be the best choice in this case. It is OK to have a plan to sell some of one’s possessions. This is not cheating. The stock doesn’t know or care that you own it.