Apple Inc. (Nasdaq: AAPL) hogged the market’s attention after Brandon Nispel, an equity analyst at KeyBanc, slashed the iPhone manufacturer’s rating to weight from overweight, citing stretched valuations and an anticipated mild growth in the US. The stock of Apple, which has appreciated 33% (after recording 46% growth at its peak in July) so far this year, ended Thursday’s trading session at $172.63, almost flat from the prior close.
According to Nispel, Apple’s shares are changing hands at a stretched valuation in comparison to the Nasdaq benchmark, while its growth rate is forecast to slow down in the months ahead.
Despite its sluggish outlook for its principal offering, as per Nispel, the stock of Apple is changing hands at a considerable premium in comparison to Nasdaq. The comparison is done based on cash flow multiples in addition to historical earnings. He further argued that providing a rationale for such an evaluation necessitates investors using valuations that are regarded as close to peak levels for Apple or for there to be a significant upward revision of its growth outlook.
The analyst also holds the perspective that the company’s most recent product, the iPhone 15, might face challenges in luring fresh customers, given that wireless carriers are offering upgrade rewards that are comparable to those from the previous year.
In particular, Brandon Nispel opined that “the accelerated upgrade rates recorded in 2020 and 2021 were mainly led by carriers actively marketing their offerings to buoy up consumer transition to 5G technology. Considering the sustained period of heightened upgrade activity in the last few years, we believe that carriers’ willingness to prompt customers to shift to the latest product has faded.”
Furthermore, the analyst believes that global growth projections for reacceleration are overly optimistic.
KeyBanc anticipates Apple to post a 3.50% y-o-y increase in FY 2024 revenue and misses forecasts calling for 6% growth. Furthermore, the analyst expects iPhone revenue to record a decline of 2.2% in 2023 and post a slight growth of 2.10% in 2024. The equity research firm also expects a slower margin increase in the upcoming years.
The analyst also forecasts weak growth in the Americas region, which generates roughly 37% of the company’s overall revenue. KeyBanc anticipates the US to record a decline in 4Q 2023 and extend into next year. The analyst points out iPhone advertisements focusing on costly plans and record low upgrade rates as the primary reasons for the sluggish demand.
Notably, in two of the last three quarters, revenues generated by the iPhone have been on the decline. Additionally, Nispel revealed that information gathered from competitors, chip manufacturers, and even contract manufacturers indicates a sluggish demand against the backdrop of a withdrawal in consumer spending and consistently high inflationary pressure in key economies.
The scheduled rollout of the iPhone 15 last month has not done much to spark another uptrend. Even though initial bookings for the iPhone 15 Pro Max have been better than anticipated, the analyst believes that many of the orders reflect a transition from the lower variants to the premium Pro Max versions.
The orders will aid in boosting the average selling price, but the aggregate unit sales figures remain almost unchanged. Currently, the shares of Apple command a 7.10x premium to Nasdaq concerning the enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio. Likewise, with regards to enterprise value to free cash flow, Apple’s stock changes hands at a 2.70x premium to Nasdaq.
Notably, the company’s CEO, Tim Cook, sold $41 million (after tax) worth of holdings, reflecting the largest selloff in over two years.
Based on the aforesaid arguments, the KeyBanc analyst downwardly revised Apple’s stock rating to weight from overweight. This is the first downward revision since Nispel started covering the stock in 2021.
The downward rating is expected to keep Apple’s stock range-bound in the short term.
The historical price chart indicates that Apple’s stock is facing resistance at $178. The next support is anticipated to be near $167. Additionally, the stock is trading below its 50-day moving average, while the stochastic indicator is near the bearish zone. Therefore, we anticipate Apple’s stock to remain in a downtrend in the short term.
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