Apple: Magically Shrinking (NASDAQ:AAPL) | Seeking Alpha

As predicted, Apple (NASDAQ:AAPL) reported a relatively bad June quarter. The stock recently traded at all-time highs, in a bizarre twist where the market still hasn’t come to grips with the reality of the growth profile of the tech giant. My investment thesis continues to remain ultra Bearish on Apple, as Wall St. continues to pump higher stock prices from a company producing subpar results.

Negative Trend

The remarkable Apple story nobody really appears to understand is that the tech giant has now reported 3 consecutive quarters of declining revenues. A lot of investors viewed the quarter as relatively strong, but Apple actually reported another quarter with revenues slipping 1.4% YoY as follows:

The only category with solid growth was Services, hitting 8% during FQ3’23. Still, Apple reported that key categories of the iPhone (-2.5%) and the Mac (-7.3%) both slipped over the prior years.

These 2 crucial categories account for over 50% of total sales. Our negative thesis is reinforced by this chart of YoY sales going back to FQ4’18. Investors just don’t appear to appreciate that Apple hasn’t been a major growth story going back to FY19, outside of the pull-forward quarters during Covid.

Over the period of 15 quarters, Apple has now reported 5 quarters with sales slipping YoY and another 5 quarters where sales were only grew 1% to 2%. In essence, the tech giant has now seen a trend of limited growth supporting a valuation more commensurate with a low-growth company, while the market is still valuing the stock based on the un-sustainable growth rates during Covid.

If this wasn’t bad enough, the management team actually provided another bad indication of the horrible growth trend. Per CFO Luca Maestri on the FQ3’23 earnings call, Apple guided to another bad quarter for FQ4 as follows:

We expect our September quarter year-over-year revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn’t worsen from what we are projecting today for the current quarter.

Analysts were forecasting slight growth heading into the quarter, and now the management teams predicts revenues will match the 1.4% dip in FQ3. One of the prime reasons Apple continues marching at all-time highs is that a lot of the analyst community continues promoting these type of results as good quarters.

Wedbush analyst Dan Ives actually hiked his price target on Apple from $220 to $230. He remains ultra bullish on the tech giant due to the upcoming iPhone 15 cycle.

At the same time, Gene Munster of Deepwater Asset Management called the number “magical” due to the record level of the active installed base. Munster is a long-respected tech. analyst.

The analyst went on to claim the company missed guidance by 1%, though the actual guidance was closer to 2% below analyst estimates. Apple may be setting up for faster growth in December, which of course would be news considering the tech giant has a long trend of not even reporting growth.

Magical Valuation

The major issue with the stock is the magical valuation. Even after the 5% dip on Friday following the disappointing earnings, Apple still trades at 30x FY23 EPS targets of $6.05 and a remarkable 28x FY24 EPS targets of $6.57. All of the stock gains this year have been due to the magic of multiple expansion.

The problem here is that Apple has constantly guided down revenue estimates quarter over quarter. The consensus estimates were for Apple to return to growth in both the June and September quarters, and the company keeps coming out and squashing estimates.

The disturbing part is that these are the valuations for Apple based on the current stock price. For the stock to reach the Dan Ives target of $230, the consensus P/E multiple on FY24 EPS estimates jumps to 35x.

Going back to Munster, the analysts justification for these high prices is the valuations of Coca-Cola (KO), Clorox (CLX) and Procter & Gamble (PG). The problem here is that these stocks shouldn’t be desirable due to a decade of weak total returns due to the very reason highlighted here about the valuation of Apple.

Investors need to understand how Apple can definitely trade at an elevated valuation, but the stock is likely to underperform the market during such a scenario. After all, the stocks constantly referred to as the reason to justify the high price have vastly underperformed the S&P 500 over the last decade.

The irony is that a cheap Apple to start the last decade was the better investment, and now analysts are suggesting investors follow that same failed playbook. Investors should look for the Apple of the next decade.

Takeaway

The key investor takeaway is that Apple continues to report weak results. The tech giant is now forecasting another quarter of sales declines, yet prominent analysts want investors to pay ever higher prices for the stock.

A reasonable valuation for Apple remains a 15x forward P/E multiple, valuing the stock at only $99.