Apple inventory appears costly vs. the remainder of the ‘Magnificent Seven’

All the whereas, Apple shares carry a excessive valuation, particularly in contrast with some faster-growing expertise friends.

Apple noticed its shares soar about 48% throughout 2023. At the identical time, its quarterly income fell between 0.7% and 5.5% throughout the final 4 quarters it reported. Wall Street analysts see solely a slightly higher image for the all-important December quarter, forecasting total gross sales development under 1%. The newest batch of iPhones hasn’t been the identical type of momentum driver as with previous fashions.

While Apple didn’t pack too many new options into the latest iPhone lineup, the corporate additionally faces stiffer competitors within the smartphone market as massive Chinese rival Huawei Technologies Inc. has upped its sport after spending years hampered by U.S. sanctions. China’s authorities can be attempting to assist home manufacturers higher compete.

Furthermore, Apple is coping with a authorized problem round its latest Apple Watch, which might be small potatoes in comparison with a sweeping antitrust case that the New York Times lately reported could also be within the works by the U.S. Department of Justice.

Given that backdrop, is Apple inventory actually deserving of a comparable — and even greater — valuation than Big Tech friends with higher development profiles?

Apple’s inventory is at present buying and selling at 27 occasions the consensus calendar 2024 earnings-per-share estimate amongst analysts polled by FactSet. (This article makes use of calendar years for all estimates, as a result of some firms, together with Apple, have fiscal years that don’t match the calendar.)

Alphabet Inc.’s Class A shares
GOOGL,
+1.97%
are buying and selling at a P/E ratio of about 20 occasions the consensus calendar 2024 estimate, whereas Meta Platforms Inc.
META,
+1.13%
trades at about 20 occasions its consensus 2024 EPS estimate.

Here is an inventory of the “Magnificent Seven” shares that led final yr’s rally for the S&P 500
SPX,
sorted by marker capitalization and together with anticipated compound annual development charges by calendar 2025, based mostly on consensus estimates amongst analysts polled by FactSet. Estimates for the complete S&P 500 are on the backside of the desk.

Apple is anticipated to develop its earnings at an annual tempo of 8.2% over the subsequent two years, whereas growing its annual gross sales at a compound annual development fee (CAGR) of 5%. Analysts anticipate a lot greater development charges for EPS and gross sales for Alphabet and Meta, and people shares commerce at a lot decrease P/E valuations than Apple does.

Even the S&P 500 is anticipated to extend EPS and gross sales extra rapidly than Apple by 2025. The benchmark U.S. index trades at 19.3 occasions weighted mixture consensus EPS estimates for 2024 — a lot decrease than Apple’s P/E of 27.

“The P/E multiple on Apple has basically doubled over the last five years, and increased by 50% in 2023,” wrote Barclays analyst Tim Long, in a downgrade notice this week. He added that Apple’s present valuation has reached a high-water mark.

Long was one in all two Wall Street analysts who referred to as consideration to Apple’s diminished development prospects within the first buying and selling week of the brand new yr. He reduce his ranking to underweight and lowered estimates for the March quarter, citing incrementally weak iPhone 15 information out of China and muted enthusiasm for the forthcoming iPhone 16.

“We believe the continued period of weak results coupled with multiple expansion is not sustainable,” Long wrote. “We also believe 2024 will bring more services risk to light.”

Apple’s companies enterprise elevated at a 9% fee in fiscal 2023 (which ended Sept. 30), however Long is anticipating companies development to develop 10% in fiscal 2024, after which gradual to eight% in fiscal 2025. Services has been a giant shiny spot of constant development for Apple in the previous couple of years.

Another analyst, Gil Luria of DA Davidson, picked up protection of Apple shares final week with an impartial ranking and a value goal of $166, noting that he believed the “current share price reflects expectations for significant resumption of growth, which is less likely without an innovation breakthrough.”

Read extra right here: Apple’s inventory must get “unstuck” and its innovation rut is probably not serving to.

Clearly, Apple wants a brand new development engine within the type of a brand new product or landmark service. The firm’s $3,499 Vision Pro mixed-reality headset will likely be out there in U.S. shops and on-line Feb. 2, with pre-orders beginning Jan. 19, however it’s an costly product in a market that has but to essentially take off.

Apple doesn’t touch upon unannounced merchandise and retains shut guard over any secret tasks it might have below growth. So buyers will likely be at nighttime for some time, till different new product plans are unveiled. That is a part of the mystique of the corporate, however additionally it is a bane for long-term buyers.

The firm is after all coping with the regulation of enormous numbers: As its income quantity hits better heights, Apple can have a harder time posting the type of double-digit development it final did in fiscal 2018 and within the Covid-19 pandemic increase yr of fiscal 2021, with an anomaly of 33.2% development. The low, single-digit development analysts now forecast for Apple appears hardly worthy of its inventory’s present a number of.

Apple nonetheless has loads of defenders. Wedbush Securities analyst Dan Ives lately pounded the desk for the inventory, saying the “‘growth demise story’ of Apple being spun by bears is a dynamic we have seen constantly over the past decade and this is just another chapter in that book.”

Ives says that with 240 million iPhones ripe for upgrades, each the iPhone and companies, by his estimates, are poised to reaccelerate in fiscal 2024, and now could be a “golden opportunity to own Apple for the next year.”

This is an existential query that buyers should ask proper now. The extra stress of a possible U.S. Justice Department case trying into how Apple exerts management to lock in customers provides extra uncertainty.

Investors must determine for themselves if Apple has dramatically higher development forward of it. If not, the inventory’s paltry however dependable dividend and its inventory buybacks is probably not sufficient to satiate Wall Street.

Philip van Doorn contributed to this text.