I have no edge on whether Apple (AAPL) will miss, meet or beat consensus expectations for sales and profits when it reports its quarterly results Thursday after the market close.
Here is what I do know, however:
1. "Groupstink" justifies Apple's near 30x price earnings multiple based on the belief that the company is more like a consumer staples stock than a technology equity. The fallacy is that consumer staples companies (like Kraft Heinz (KHC) or Kellogg (K) ) sell their products daily. Apple does not sell its iPhone daily to the same consumer! Rather, Apple's smartphone is a $1,300 unit subject, increasingly, to the vagaries of the economy and specifically to influences facing the consumer.
2. We are more pessimistic on the consumer than most -- lagged impact of rising rates, drawdown of savings, higher mortgage (consumer and other) interest rates.
3. We view, strongly, that the iPhone will be subject to price/demand elasticity over the next 1-2 years.
4. For the same reasons, personal computer shipments are not a consumer staple! (Dell Technologies (DELL) and HP (HPQ) trade at single-digit price-earnings valuations.)
5. In the 2015-2000 interim interval iPhone shipments suffered annual shipment declines. It wasn't until Covid that iPhone shipments dramatically rose (to over +50% year over year). Covid, as we have learned from Peloton (PTON) , Zoom (ZM) , and nearly every Cathie Wood disruptor, pulled forward sales of iPhones.
6. As the global economy enters some tougher sledding (as the lagged impact of higher interest rates begins to be felt), the two core product offerings at Apple are vulnerable to weakness relative to consensus expectations.
7. Maybe business services saves Apple (tongue in cheek!)
In fact, Apple is my Trade of the Week:
May 01, 2023 ' 06:40 AM EDT DOUG KASS
Trade of the Week - Short AAPL ($169.68)* With an eps report coming up early this week, this trade is not without risk...
Apple is my Trade of the Week - short trade, that is...
Here Is the Rationale for My Apple Short:
-- Apple now represents a record 7.1% of the S&P 500 Index. History is unkind to previous S&P leadership.
-- An extended stock chart that everyone is looking at.
-- A $2.7 trillion market cap. The Mother of all bubbles?
-- Cleveland Research delivered a bearish note on Friday, cutting estimates for the March and June quarters and putting fiscal 2023 estimates below consensus, based on deteriorating sell through and normalized inventory.
-- Despite protestations from many, domestic and worldwide economic growth is turning lower -- and is being ignored by a S&P Index trading above 19x:
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-- In a moderating global economy in which the consumer may be pressured, will demand elasticity hit the high-end smart phone market, in general, and Apple, in particular?
-- It appears that the domestic economy (based on a plethora of corporate comments following EPS releases - e.g. Packaging Corp. (PKG) , United parcel Service (UPS) ) began to deteriorate markedly.
-- Apple's dependency on supply components sourcing from China -- during a period of rising geopolitical tensions between China and Taiwan -- represents an existential risk.
-- Nasdaq technicals are now suspect. New lows have expanded on higher Nasdaq highs recently. On Friday there were 201 new yearly lows and only 67 new 52-week highs. At the previous Nasdaq high, new lows were at 181. As well, the number of Nasdaq stocks above their 200-day moving averages have also declined in April from the previous Nasdaq high in February.
-- There was a negative RSI (Relative Strength Index) divergence in the move to a recent high in Apple's share price.
-- The general market has narrowed, with Apple and a handful of other large-cap tech stocks buoying the averages. In August 2022, 67% of the S&P Index outperformed. Today, only 26% are outperforming, and that's a near 20-year low!
-- A Nasdaq 100 basket of stocks is 3.15x as much as that of the S&P index, eclipsing the previous record of 3.12x experienced in the Dot-Com bubble.
-- A pause for longer by the Federal Reserve (my base case expectation) portends continued elevated Treasury bill yields, which are fundamentally negative for valuations of long duration assets. The last time Two-Year Treasury notes yielded over 4% (now 4.07%) the Nasdaq was much lower.
Post Script: I would continue to remind subscribers that short-selling is not recommended for most as it requires trading/price discipline, reward vs. risk is asymmetric, etc.
(This commentary originally appeared on Doug Kass's Daily Diary on Real Money Pro on May 3. Click here to learn about this dynamic market information service for active traders and receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
