Source: PaxForex Premium Analytics Portal, Fundamental Insight
After a robust performance in 2023, with Apple shares surging 48%, the stock has entered a period of consolidation in the early months of 2024, showing a decline of over 3% year to date. This prompts the question: is this a favorable moment to acquire shares in the renowned iPhone maker, or does the stock's downturn reflect justified concerns?
To assess the attractiveness of Apple shares at present, let's examine both the pessimistic and optimistic perspectives for this tech giant.
The bear case against Apple, or reasons not to own the stock, can be succinctly summarized in two key points:
- The company has faced challenges in expanding its revenue recently, and the valuation of its stock appears to be reaching potentially inflated levels.
- Concerns are mounting among investors that the company might fall short of the lofty expectations currently embedded in its stock price.
In terms of the company's growth trajectory, fiscal 2023 witnessed a nearly 3% decline in year-over-year revenue. Additionally, earnings per share demonstrated marginal growth, reaching $6.13 for the period - only a slight uptick from the $6.11 reported in the corresponding quarter of the previous year. The slump in iPhone sales and a significant reduction in Mac sales heavily influenced the annual results. Furthermore, unfavorable foreign exchange conditions significantly contributed to the decline in both revenue and earnings.
The stock's valuation has also become a point of contention. Over the past year, the price-to-earnings ratio has surged from 22 to exceed 30. To put it differently, the company now boasts a market capitalization of $2.9 trillion, despite annual earnings totaling only $97 billion.
This elevated valuation presupposes robust earnings-per-share growth for the foreseeable future. Specifically, maintaining a valuation at this level necessitates achieving average annual earnings-per-share growth in the mid-to-high single digits over the next decade. More significantly, it demands the continual dominance of lucrative segments such as the iPhone and services in the market.
However, dismissing Apple altogether might be premature. The bullish case for owning Apple stock outlines compelling reasons why the company could sustain robust earnings growth in the coming years.
Firstly, the rapid expansion of Apple's services segment stands out. This segment, encompassing revenue from services like Apple Pay, Apple Music, AppleCare, and revenue share from third-party applications in the App Store, demonstrated a remarkable 16% year-over-year growth in Apple's most recent fiscal quarter. Management anticipates similar growth in the first quarter of fiscal 2024, adjusted to exclude revenue from the additional week in the year-ago period. Looking ahead, optimistic indicators are supporting the continued momentum in Apple's services, including the emergence of a significant advertising business, Apple's consistent ability to introduce new services over time, and the flourishing growth in third-party app subscriptions.
Another compelling factor supporting a bullish outlook on Apple stock is its robust balance sheet, coupled with a commendable track record of capital allocation by the management. Closing fiscal Q4 with a net cash and marketable securities position of $51 billion, Apple has set a goal to eventually become cash neutral - where total cash and marketable securities equal total debt. The company has been steadily repurchasing its shares and paying dividends, showcasing a judicious approach to buybacks that maximizes the impact of each dollar spent. This strategic approach allows Apple to opportunistically buy back more stock when shares appear undervalued, enhancing the efficiency of its repurchase program.
Despite the ambitious goal of achieving net cash neutrality, given its annual free cash flow of nearly $100 billion, Apple is poised to continue substantial share repurchases and meaningful dividends in the foreseeable future.
Combining these positive developments, including a flourishing services segment, prudent capital allocation supported by a strong balance sheet, a loyal customer base, and Apple's storied history of innovation, there is a credible argument for the tech stock trading at a premium valuation. While an aggressive purchase may be unwarranted at the current valuation, investors lacking exposure to the stock might consider initiating a modest position following its recent decline.
As long as the price is above 179.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 181.98
- Take Profit 1: 186.00
- Take Profit 2: 190.00
Alternative scenario:
If the level of 179.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 179.00
- Take Profit 1: 175.00
- Take Profit 2: 171.00
