Rarely is there a time when Apple (AAPL) is not a battleground stock.
For all the company's success, the stock has many detractors who question the premium valuation or the innovative advances. As for Apple's iPhone sales, which account for about ~50% of revenues, analysts and reporters are left to divine the demand from tight-lipped suppliers and delivery wait times.
Throughout the last few weeks, analysts have read solid demand for sales in the high-end models and tepid demand at the lower end. Yet, last Tuesday, Bloomberg read into future demand differently -- one roundly criticized by Wall Street analysts -- reporting that Apple will cut back a potential increase in production.
Almost every year, investors fret over reports that Apple might cut iPhone production. With a global recession in the air on Wall Street, stories of weaker-than-expected demand easily gain traction.
Morgan Stanley commented on Bloomberg's report, "We'd highlight that our Apple supply chain team has maintained expectations for 90M new iPhone 14 model builds in C2H22 (flat Y/Y), in line with the 90M C2H22 iPhone builds being reported tonight. As a result, tonight's reporting does not imply any downside to our iPhone shipment forecasts."
Apple is the most thoroughly scrutinized Wall Street company, however, it's often underestimated.
The day prior to the Bloomberg article, Apple made a new all-time high versus the S&P 500. What's the secret sauce that helps Apple consistently outperform the market and continue to be a go-to stock on weakness?
In part, the shares attract safe-haven money with a cash-heavy balance sheet, reliable cash flow, and a massive buyback. Investors can be assured that Apple will buy back annually 3-4% of its shares. A buyback of $1.7 billion per week on average adds up.
Since 2012, Apple has reduced the share count by nearly 40%, from 26.1 billion to around 16 billion. Just over the last two years, when AAPL first hit the $130s, the company has repurchased ~1.5 billion shares, lowering the market cap by over 8%.
Apple can innovate primarily from within, without the risk of large acquisitions. Over time, their ecosystem has strengthened with new services and wearable products. No company has created multi-billion dollar products in new categories as consistently. The successful new watch line in the athletic/adventure category may add $3 billion to $4 billion in incremental revenue in 2023. Sure, that's only around 1% of their annual revenues, but the additional diversification and ecosystem reach are key.
Apple is not immune from macro-driven forces, though. For one, the strong dollar takes a bite out of their international revenues, which comprise about 55% of sales. China lockdowns and economic weakness, the war in Ukraine, Europe's energy woes, higher interest rates, and global recession risks are among the issues that could dent Apple's business. On the plus side, Apple generally has kept domestic prices flattish, improving affordability as nominal wages rise.
Apple's premium valuation also stems from the company's R&D pipeline. Gross margins and Mac performance have been propelled since 2020 by the ongoing replacement of Intel's (INTC) chips with their in-house processors. Plus, Apple is slated to enter a new product category by releasing a virtual-reality/augmented-reality headset in early 2023. It wouldn't be surprising to see $8 to $10 billion in annual revenue from the device.
Apple CarPlay for automobiles continues to move forward , but the unveiling of Apple's advancements in autonomous driving technology likely are a few years out. Additional services and subscriptions have increased margins, diversified and given ballast to its business.
Products in the pipelines take a backseat when Wall Street becomes hyper-focused on near-term macro concerns and the most recent iPhone sales. Jefferies has noted potential weakness in iPhone sales in China -- the country accounts for ~18% of revenues. However, they've maintained a $200 price target, based on their 26.7x CY 2023 EPS projection for the base business. Nonetheless, AAPL could be in Wall Street's cross-hairs on demand concerns until earnings are released in late October.
With the market in the capitulation-prone month of October, AAPL may also undergo selling pressure. The discounting of economic distress will be a buying opportunity for the strongest companies, especially Apple, as it churns out new and enhanced products and services.
Wall Street will debate how much demand was pulled forward during the pandemic, the strength of the latest iPhone cycle, and if a low 20s P/E is too rich. Among all the concerns on Wall Street, Apple will still reliably be one of the best go-to stocks on weakness.