Apple Stock (AAPL): Currency, China, Europe, All Headwinds

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investment thesis

Apple (NASDAQ: AAPL) managed to survive the quarter. Many investors, including myself, were very hesitant about how the results would work out. But Apple managed to reassure investors that it is a very high-quality company, despite everything that is thrown at him.

As we will soon go on to discuss, there was one major issue that will affect Apple in the coming quarter: currency.

The coin is expected to provide a 10% headwind. That’s just unusual pressure. For a company with Apple’s expected revenue growth rates, this makes the difference between no growth and some growth.

The other consideration we’ll discuss is that Apple’s valuation is still overkill, preventing more investors from getting involved with the name.

There’s a long way to go, so let’s get started right away.

Results Q4, what is happening?

Perhaps it goes without saying, but the quarter that just passed runs from July to September. We know from company comments that during July and August the macroeconomic environment was more or less stable, but from September the context deteriorated.

Therefore, what happened in the quarter is not as significant as what is to come. While this is always the case, with the market always looking ahead at least 6 months, this is now more applicable than ever.

As a reminder of what I highlighted above, there are three critical aspects that I believe will negatively affect Apple in the future.

  • Chinese risk.
  • There is Europe.
  • There are winds against the currency.

I will refer to these in reverse order. Currency headwinds are likely to be around 1,000 basis points for overall growth in the first quarter of 2023. For a company the size of Apple, that can make the difference between some growth or no growth.

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Europe is facing a severe economic slowdown. Europe has been plagued by exorbitant energy prices, which are limiting manufacturing and dramatically affecting the purchasing power of household incomes.

Again, this will not be reflected in the current quarter, because the situation has only reached a crescendo since the summer.

Next, China is growing at the slowest rate in years. China is no longer the growth economy that drove Apple’s earnings higher. In fact, China growth in the quarter was 6%, a drag on company-wide growth of 8%. A reversal of what we have been used to seeing.

With these top 3 considerations in mind, let’s move on.

Single digit revenue growth rates

AAPL Revenue Growth Rates

AAPL Revenue Growth Rates

Apple openly states that “as reported” revenue growth rates will slow from the quarter just reported. That means we’re likely to see Apple revenue growth of less than 8% annually in the first quarter of 2023.

Put another way, let’s be honest, for now, Apple is no longer a growth company.

Profitability profile, Bull Case weakens

For the fourth quarter of 2022, operating margins were 29%, and this time, operating margins were reduced by 100 basis points to 28%. Now keep in mind that the bull case is that Apple Services should lead to margin expansion, as Services should grow faster than iPhone sales.

But that is not what we see here. In the fourth quarter of 2022, services increased 5% year over year, while the successful iPhone lineup saw iPhone revenue growth of 10%.

Put another way, the core of Apple’s bull case, Services, is slowing down.

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That said, as mentioned above, Apple’s operations are affected by currency. For example, during the call, we are told that Services revenue in constant currency is up double digits.

Similarly, looking towards Apple’s guidance, Apple states that at the midpoint of its gross margin outlook, there should be a 100 basis point compression.

AAPL Stock Valuation – EPS Advance 24x

AAPL EPS Consensus

AAPL EPS Consensus

Here’s the thing. Analysts refuse to revise down Apple’s EPS estimates. Even now, so late in the game, you can see from the red arrow above that for the first quarter of 2023, analysts are not lowering their consensus EPS estimates. Why?

Because you don’t want to be the house on the sell side reviewing Apple’s stock down. That’s bad for business.

Despite the fact that Apple mentioned that the first quarter of 2021 would see slowing growth rates and a compression of gross margins, in addition to currency headwinds that would affect operating margins.

Looking ahead, analysts expect Apple to deliver $6.55 of EPS. This is a figure that I think needs to be revised down by at least 5%, if not 10%, to about $6.00.

That leaves Apple with a price of 24x EPS up front. Simply put, I don’t think paying more than 20 times future earnings for a company with mid-single-digit growth is a bargain.

The bottom line

For investors who don’t own Apple, is this really the time that investors are going to think, the company is reporting so much growth, I have to accept this growth? I don’t think that’s the case.

And on the other side of the spectrum, as I’ve already discussed, I just can’t get the math to work to justify its valuation.

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So, the stock market is no man’s land. It’s not cheap enough for bargain hunters or fast enough for growing investors.

That said, there is a limitation to my analysis here. I acknowledge that Apple earns 7% of a weighted S&P 500 ETF (SPY). That means that even if AAPL stock is overvalued, every time investors buy an ETF, they are forced to buy Apple, meaning capital flows will continue to flow into the stock, providing support for the stock.

Does that mean the story ends here? I do not think it does. I think we’re going to start to see more and more investors questioning Apple’s valuation.

I think when investors start looking around, where there are countless tech companies, doing exciting things with good profitable prospects, that are down 50%, 60%, sometimes 80% from previous highs , that will lead investors to take some profits here and deploy capital elsewhere. However that works out, good luck with the rest of earnings season.

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