Apple Inc. (NASDAQ:AAPL)
Investors in Apple Inc. (NASDAQ:AAPL) are undoubtedly anticipating the company’s introduction of its much-anticipated mixed reality gadget at June’s global developers’ conference, or WWDC.
Meta Platforms, Inc. has decreased the price of its Oculus devices, so there’s no need to get too enthusiastic about Apple’s “moonshot” effort to revolutionize the AR/VR industry.
Meta is dedicated to becoming the industry leader. Presumably, she wants to strengthen its position as the market pioneer in anticipation of Apple’s entry. Facebook’s CEO Mark Zuckerberg saw META’s worst-ever fall in recent history because of Apple’s ATT.
And because Apple’s first mixed reality gadget is said to cost between $3,000 and $5,000, it’s likely aimed at professional users, so early excitement should be tempered. Apple’s supply chain partners anticipate just 1.5 million shipments for the first year, which would result in a maximum of $6 billion in income for the company. That amounts to around 1.5% of Apple’s estimated sales of $389.2B in FY23. Do they believe the hype or not? Investors should use extreme caution.
To support the current average price target (PT) of $168.4, Wall Street analysts have high hopes for Apple’s ability to generate growth in subscriptions and services.
Morgan Stanley, an Apple bull with a price target above the consensus of $180, thinks the company’s services business’s health might help it rebound. Its focus was on the following:
However, Apple’s services division is predicted to grow double-digit revenue in 2023 and 2024. An uptick in app downloads, higher prices, and fewer currency fluctuations will contribute to that result. Products like Apple Music, Apple TV+, Apple One, and overseas applications may see these price hikes. — CNBC Professional.
Shouldn’t potential investors wonder whether that thesis is plausible? Morgan Stanley’s heavy bets on service sector expansion beg the question: why? Note that Apple’s services division is its primary source of profit, with an estimated average EBIT margin of 66%, far higher than iPhone’s average EBIT margin estimate of 25%.
Apple’s corporate EBIT margin profile was 30.7% in the most recent quarter, and astute investors will want to keep it in mind. Therefore it’s easy to understand why Microsoft thinks a revival in Apple’s services sector is essential to any upward revision of the company’s market value.
Analyst consensus predicts a 1.3% drop in sales for Apple in FY23, which may lead to a 5.9% drop in corporate EBIT growth.
Even though Morgan Stanley predicts an 8.5% rise in services revenue by 2023, Trefis’ sum-of-the-parts (SOTP) value implies the projection may be too optimistic.
Investors should be wary of counting on its high-margin services division to offset the decline in iPhone sales with double-digit growth.
Android’s rivals will release new, higher-end devices to better compete with Apple.
Yet, Apple has a tight hold on the Millennial generation, which bodes well for iOS’s chances of gaining market share at the expense of Android in the future. This suggests that Apple’s efforts to broaden its ecosystem of devices and use its enormous installed base may offset the slowing growth of its iPhone sales.
The main issue, though, remains the same. With analysts anticipating a significant upward inflection in Apple’s services growth normalization over the next two years, we fear that the scene is set for disappointment should Apple’s execution slip.
Additionally, AAPL’s NTM EBITDA multiple of 18.5x has not mitigated its overvaluation headwinds, as it is much higher than the company’s 10Y average of 11.4x.
After Apple Inc. reported profits, its share price likewise seemed to stagnate. As a result, sellers may spread their stock and cash following January’s upswing.
Similarly, AAPL’s momentum has diminished, and it has been setting lower highs.
Analysts’ optimism for a rapid reacceleration in its growth drivers and the difficulties we’ve already mentioned is not encouraging.
To potential investors, Apple Inc. presents an unappealing risk/reward ratio. Sellers who have made significant gains might consider cashing out and moving on.
Featured Image: Pixabay @ duchu
