Apple Premium Valuation Questioned Amid Slowing Growth
Is Apple stock highly valued or overvalued? That’s the big question as the company reports its quarterly results as it faces slow growth in its core smartphone business. While the stock is up by more than 30% for the year, outperforming S&P 500 and the Nasdaq 100, investors are becoming increasingly jittery about its long-term prospects.
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Apple stock’s impressive run in the market comes on investors turning to tech companies in the aftermath of the turmoil in the banking sector. As a result, the stocks have emerged as a safe haven, especially on the likes of Amazon, Google, and Microsoft, delivering impressive quarterly results despite the challenging economic conditions.
Likewise, tech stocks have also benefited from the growing belief that the Federal Reserve is nearing the end of its aggressive monetary policy tightening spree. After raising by 25 basis points in its latest meeting, the FED has already hinted that this might be its last hike, something that has worked in favor of tech stocks that are often susceptible to high-interest rates.
While Apple has benefited from a string of positive news in the industry, an uncertain future, especially in its core hardware business, threatens to take a toll on its sentiments in the market. In addition, its valuation has come under immense scrutiny in recent months.
The iPhone maker is trading at an elevated valuation despite being marred by a weaker growth outlook. Unlike in the past, where iPhone sales were a key driver of growth and revenue, saturation in the smartphone market means the company sells fewer devices than it used to. Likewise, the company is expected to deliver a 4.8% drop in its fiscal second quarter revenues and a 5.8% decline in earnings, affirming the slowing growth.
It will mark the first time since 2019 that Apple has delivered a decline in sales, affirming everything might not be well at one of the most valuable companies in the world. Consequently, it begs the question of whether the stock should continue trading at 26 times its estimated earnings which is way above its ten-year average of 18.
For Apple to continue enjoying the high premium on valuation, it needs to continue growing sales as it did in previous years. However, that looks unlikely as people are no longer spending on hardware as they used to. In addition, high inflation levels and the ever-growing recession risk have taken a significant toll on spending patterns which are taking a toll on Apple’s revenue streams.
Raising serious concerns about iPhone demand, is Qualcomm issuing disappointing forecasts. As the largest maker of smartphone processors, the company does big business with Apple. Consequently, whenever it raises concerns about sales, it is always indicative of Apple not selling as many iPhones or other hardware as it ought to, to call for the production of more chips.
Staring at a significant drop in smartphone sales, analysts have been trimming their expectations on Apple stock. As a result, consensus estimates on revenue and earnings have been dropping ever since the tech giant reported its quarterly results in February. Likewise, analysts expect the stock only to return 4.6% over the next 12 months, the lowest among the trillion-dollar companies led by Microsoft and Amazon.