Apple’s (AAPL) muted reaction in the pre-market (so far) to its fiscal Q4 report / Q1 guidance means the stock is in a very different category than that of some of its mega-cap tech peers like Amazon (AMZN) and Google (GOOGL) whose stocks saw large post earnings rallies following better than expected results. The one big difference among these stocks is investor perception between value and growth. In AAPL’s case the stock has for years been viewed as a value stock, for the past few years trading below a market multiple, with a fortress balance sheet and a massive commitment to capital return. Over the past year the stock has actually modestly bested the performance of the S&P 500, but sorely lagged the 33% gains in stocks like Facebook (FB) and GOOGL, and the 100% gains in AMZN. Investors have shifted focus to growth at a ridiculous price, away from value that has already priced in recent growth.
As for the mega-cap high valuation growth stocks, I have little to add. I have been skeptical that the upward momentum in stocks like AMZN and FB can continue, and I have clearly been wrong. But for AAPL its been my view that investors have not yet priced in the massive deceleration in growth from fiscal 2015’s 43% eps growth & 28% sales growth that came from a MASSIVE upgrade cycle associated with new larger iPhones last September. So for AAPL, why should we expect to see a re-rating higher in AAPL in a year where growth will clearly decelerate?? Consensus estimates call for 6% eps growth and 5% sales growth in the current fiscal year, without some sort of excitement surrounding a new product category, or the Watch or Services having a surprised lift, I just can’t see the case for multiple expansion unless there is a massive rally in the broad market.
There was nothing wrong with the quarter nor the forward guidance they gave. The average selling price on the iPhone, which increased to $670 (up 10% year over year), was off the charts and demonstrates their pricing power in a maturing smartphone market. The fact that 30% of the 48 million iPhones sold last quarter came from Android switchers demonstrates the attractiveness of AAPL’s offerings. And the company is growing among business customers, with nearly 10% of their fiscal 2015 sales coming from Enterprise customers, up 40% year over year. And one of the largest perceived threats to AAPL was a material slowdown in growth in China, which did NOT occur in the last quarter. Sales increased 99% in the country year over year, down 5% sequentially.
Things are good at AAPL. But they may be as good as it gets until we see a ramp into the iPhone 7 (expected in September 2016.) While bulls will point to a continuation in growth in China as the engine to fuel the stock, I still think China poses more risk in the near term than it does reward. A material deceleration in sales would cause a meaningful selloff in the stock as China is the company’s big hope. They can talk about switchers and upgraders all they want, but it does appear that in mature smartphone markets the upgrade cycles are stretching out a bit. Let’s see if the company’s leasing program can accelerate this process. My guess is it’s only a marginal improvement at best given the lack of differentiation in the most recent iPhone 6s upgrade.
As I have suggested for months now (here in June), I think the stock will remain devoid of new catalysts, and is likely dead money for the time being. For those of you in the own Apple, don’t trade it camp, (which I think is a questionable approach to risk management, read here and here) you may want to consider an actively managed call overwriting campaign against your long stock in an effort to add yield to a stock that is likely to be range-bound until the company can demonstrate a new product category that can move the needle on their $234 billion revenue base. (We’ll try to regularly detail yield enhancement overlays on the site for AAPL shareholders.)
In sum, I see far worse places to park some cash, but I think it is important to remember that much of the stock’s massive 800% plus run from its financial crisis lows were driven by new innovative products in a fairly under-penetrated mobile computing market. Market share gains in developed markets could become a story, a reemergence of left for dead categories like iPad, and unexpected success in services or wearables could all be catalysts, but they remain elusive at best in the coming months. For the stock to get back on its horse, the company will need to maintain the growth in China and make progress in other emerging markets at a time when global growth appears to be under a strain.