Apple Stock: Use The Recovery To Sell And Get Out Once And For All

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Michael M. Santiago

Thesis

Apple Inc. (NASDAQ:AAPL) stock has recovered remarkably from its June lows, up nearly 25%. The Street set the bar pretty low for Apple pre-Q3 earnings. As a result, the market brushed off its near-term challenges, demonstrating its confidence in CEO Tim Cook and team. Notably, most of the recent gains were achieved pre-earnings, suggesting that the market was pretty confident heading into its Q3 release.

We also noted in a late-June article that AAPL was likely at a bottom and could hold its June lows. Yet, we didn’t encourage investors to buy the dips, as we believe that AAPL could underperform over the medium term, even as tech seems to be heading out of a bear market. We maintain our view.

Furthermore, we believe that the sharp reversal in AAPL is unsustainable. While we don’t think that AAPL is grossly overvalued, we believe there are too many attractive opportunities in other growth and tech plays right now.

As a result, we revise our rating on AAPL from Hold to Sell.

The Slowdown Started For Apple Before Its Q3

Apple revenue by product change % (Company filings)

Apple reported revenue growth of 1.9% in FQ3, while EBIT fell 4.4% YoY. However, both lines came in ahead of the consensus estimates (bullish). Therefore, the pre-earnings recovery in AAPL demonstrated that the market had gotten it right as it anticipated better-than-expected results.

Notwithstanding, investors should carefully assess the markedly declining revenue trend in its critical revenue segments. As seen above, Services held the line in Q3, with a growth of 12.1% YoY. However, iPhone (+2.9% YoY) and Mac fared poorly, as they got caught in China’s COVID lockdowns, with Mac’s revenue down 10.1% YoY.

Therefore, we believe it’s clear enough that the consumer slowdown has not merely occurred in Apple’s FQ3. The normalization from the rapid growth during the pandemic has continued to manifest. Therefore, unless Apple has something dramatic that can move its revenue by a mile, why should investors expect it to outperform?

Even Wall Street Isn’t Convinced

Apple revenue change % and adjusted EBIT change % consensus estimates (S&P Cap IQ)

Even the bullish Street analysts believe that Apple’s revenue and EBIT growth could continue to moderate through 2023 before recovering. However, it’s nowhere near the metrics that Apple posted over the past five to ten years.

For example, the consensus estimates indicate that the Cupertino company could deliver revenue and EBIT growth of 6.8% and 9% YoY in its Sep’23 quarter. However, it’s not even close to its 5Y and 10Y revenue CAGR of 11.1% and 12.9%. It’s also nowhere near its 5Y and 10Y EBIT CAGR of 12.7% and 12.4%.

So, are investors expecting something massive to move the needle moving ahead? Morgan Stanley (MS) suggested that its subscription stream could help Apple gain another $1T in market cap. It articulated (edited):

We believe a more pronounced shift to a subscription-like model could add roughly $1 trillion to Apple’s current market capitalization. The market continues to value Apple as a hardware company so that the shares trade at a deep discount to both software-as-a-service and subscription-driven streaming companies. However, as Apple’s installed base matures, retention rates remain stable or even improve from already high levels, new market opportunities emerge, and Apple achieves sustained growth in spending per customer, investors will begin to gravitate toward a more lifetime value-based valuation approach. – Barron’s

Loup Ventures is even more confident, believing that Apple’s future optionalities could help sustain positive sentiments in the tech behemoth. Accordingly, it accentuated (edited):

More important – looking beyond FY23, there are other potential areas of growth on the horizon. It includes health, AR/VR headsets, and potentially in auto. Just hope that these potential game-changers should be a positive for AAPL’s multiple in the years to come. – Loup

Famed Apple analyst Ming-Chi Kuo also believes that Apple could ship 10M AR/MR units by 2025/26, competing against Meta’s ecosystem to define the “metaverse.”

However, while we acknowledge Apple’s remarkable execution prowess and supply chain resilience, it probably isn’t enough to justify its valuation over the next four years. We believe Apple’s big break could potentially occur in Apple Car. But that still looks far-fetched for now, and investors are reminded not to invest in hope.

Is AAPL Stock A Buy, Sell, Or Hold?

AAPL price chart (weekly) (TradingView)

AAPL recovered with aplomb from its June lows. While we had expected its June bottom to hold, we didn’t expect the pace and the magnitude of the recovery.

Notwithstanding, we believe the rapid surge from its June lows is unsustainable. Therefore, we expect AAPL to face significant selling pressure at its near-term ($166) and intermediate resistance ($180). Hence, we believe the potential upside is increasingly unattractive and don’t encourage investors to add new positions at the current levels.

Instead, investors should use the current levels to rotate out of AAPL into beaten-down growth and tech stocks and ride the potential recovery.

Accordingly, we revise our rating on AAPL from Hold to Sell.

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