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Apple: Demand For iPhone 14 Softening (NASDAQ:AAPL) – Seeking Alpha

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With signs of slowing demand for the iPhone 14 in the first few weeks after launch, we think financial estimates are far too rosy for Apple Inc. (NASDAQ:AAPL). I expect analyst estimates for 2022 and 2023 will start coming down in the next few weeks to reflect reality. Furthermore, with the stock still trading at almost 25x Fwd P/E, high by historical standards, I think there is a substantial downside to the stock price. I would recommend investors stay on the sidelines.

China Loves Apple

A few days ago, I read an interesting article in a Chinese business-focused blog discussing the rapid cooling in the scalping market for the new iPhone 14.

First, a brief introduction for those not familiar with the scalping market. Ever since the introduction of the iPhone 4 and 5 models a decade ago, there has been an informal grey market in the scalping of new iPhones in Hong Kong and China. On initial release, scalpers would buy tens to upwards of hundreds of handsets, and then resell the devices at a few hundred RMB/HKD mark-up. At peak frenzy, some scalpers reportedly made over a million RMB a month in profits scalping the iPhone 6 at 5,000 to 6,000 RMB mark-ups.

The presence of these scalpers is why Apple often reports a shortage of devices when they launch a new model, as the scalpers literally paid people to line up and obtain the devices for them.

Scalpers Selling Devices At A Discount

Fast-forward to the iPhone 14, and it seems life has not been great for scalpers. According to the businessfocus.io article, since the launch of the iPhone 14 two weeks ago, scalpers have been hoarding devices in the hopes of making a killing in the price markup. However, in recent days, scalpers have been interviewed seeking a 100-500 RMB discount to the MSRP to offload their inventory, as sales have stalled.

In fact, if you perform a search of the key terms on Google (translated as “Apple 14 selling at 100 discount”), you would find lots of mention on Chinese social media of scalpers selling their iPhone 14s at a discount (Figure 1).

Figure 1 – Google Search On Selling iPhone 14 at a Discount (Author created using Google)

Apple Rumored To Ditch Plans To Increase Production

Overnight on September 27th, Bloomberg News reported that Apple had asked its suppliers to back off from plans to increase production by up to 6 million units in the second half of 2022. Instead, Apple plans to keep handset production steady at 90 million units. This essentially confirms the weakness in demand that was noted in the businessfocus.io article.

Financial Estimates Too Rosy?

Currently, financial analysts are expecting Apple to report mid-single-digit (“MSD”) revenue growth, expanding EBITDA margins in Fiscal 2022, and MSD EPS growth (Figure 2).

Figure 2 – Apple Consensus Estimates (TIKR.com)

I believe these estimates are far too rosy. First, if we look at Apple’s financial results for the 9M YTD June 30, 2022, we see that much of the growth YoY has been from iPhones and Services, which combined for $18.6 billion of the $21.7 billion in YoY growth.

Figure 3 – Apple Q3/2022 YTD Sales By Category (Apple Q3/2022 Financials)

If we now assume flat handset volumes growth (if the Bloomberg article is to be believed), and given that handset pricing is flat in the U.S. and China, it is hard to arrive at MSD consolidated growth for the company.

Furthermore, with surging inflation in labor and materials, it is hard to understand how analysts keep estimating an expanding margin for Apple. Referring to Apple’s Q3 YTD financial summary, we can see that although the top line grew 7.7% to $304.2 billion, R&D expenses actually grew 21.1% YoY and SG&A grew 14.0% YoY (Figure 4). At some point, if growth slows to low-single-digit or worse, and expenses keep rising at a strong rate due to inflation, we should begin to see margin compression.

Figure 4 – Apple Q3/2022 YTD Financial Summary (Apple Q3/2022 Financials)

Apple Gets An F for Valuation

While Apple is a great company and continues to churn out products that consumers love, the valuation multiple is simply outrageous. Seeking Alpha’s valuation tool gives it an “F” on valuation, with Apple shares trading at a 24.9x Fwd P/E, far above the sector median at 16.9x.

Figure 5 – AAPL Valuation Gets An F (Seeking Alpha)

Valuation Multiple Extended Vs. History

In fact, this was not always the case. If we look at Apple’s historical valuation, we can see that prior to the COVID pandemic, Apple’s Fwd P/E multiple hovered around 15x, which is understandable for a company only growing at MSD growth rates.

Figure 6 – AAPL Historical Fwd P/E Stretched (TIKR.com)

However, the COVID pandemic turbocharged valuations and Apple traded as high as 35x Fwd P/E. As the Fed continues raising interest rates, we believe there is a high probability that valuation multiples compress across all sectors and industries. If Apple just trades back to the top end of the previous range, 20x Fwd P/E, we could be looking at a significant downside in terms of stock price. Based on the consensus EPS estimate of $6.10 / share, 20x Fwd P/E would argue for $122 stock price.

Conclusion

With signs of slowing demand for the iPhone 14 in the first few weeks of launch, we think current financial estimates are far too rosy for Apple. I expect analyst estimates for 2022 and 2023 will start coming down in the next few weeks to reflect reality. Furthermore, with the stock still trading at almost 25x Fwd P/E, high by historical standards, I think there is a substantial downside to the stock price. I would recommend investors stay on the sidelines.

Source: https://seekingalpha.com/article/4543873-apple-demand-for-iphone-14-softening