Peak investor optimism on Apple shares looks to be coinciding with peak earnings, which is incredibly bearish for 2022-23.
Any problems with Apple’s supply chain coming out of China or related to a drop in consumer spending could slash margins next year.
Analyst estimates for long-term results are already highlighting the potential for real downside in Apple.
Other risks include rising inflation and interest rates, in addition to the high odds of a major bear market on Wall Street, following the end of 2020-21 free-money government giveaways to fight the pandemic.
kokkai/iStock Unreleased via Getty Images I admit to being Neutral to Bearish on Apple ( AAPL ) over the past year, incorrectly so. I do not own shares, and have shorted Apple for days or weeks at a time on several occasions. My family owns five or six Apple products. I don’t have any knock against its leading gadgets, smartphones and computers to explain my negative view of the stock.
My pessimism/bearishness is part of a contrarian investment slant. I am a skeptic and like to play devil’s advocate in my investment process. I am also an investor/analyst that participated in the last technology boom ending in 1999-2000. In my experienced opinion (with numerous other financial market experts coming to the same conclusion in 2021), Apple’s current price/value, approaching an American record $3 trillion for equity market capitalization, looks destined to fall appreciably in 2022-23.
Not only is Apple today discounted at its greatest overvaluation in history on a variety of fundamental/trading metrics, but robust profit margins on peaking income growth are part of the investment puzzle going into next year. This peak on a peak setup is nearly identical to the last bubble top in technology names, which was followed by an 80% drop in Big Tech between 2000-02, as measured by the Invesco NASDAQ 100 ETF ( QQQ ). Arguing Apple is not in a bubble when looking at super-confident Wall Street sentiment and absurd valuations on a low-growth future may prove quite foolhardy soon. Valuation Concerns
You have to go back to the Standard Oil , Rockefeller years a good century ago to find another company valuation that represented a similar percentage of the U.S. economy. [The crazy point to contemplate is Microsoft ( MSFT ), Alphabet ( GOOG ) ( GOOGL ) and Amazon ( AMZN ) are not far behind.] My question to Apple shareholders is how can the company mathematically grow much in value, when it is reaching for the point where government antitrust action has erupted in the past? Apple’s business worth stands at a gargantuan 10% of U.S. GDP output annually, a record 7% of S&P 500 index capitalization, and a previously unimaginable 12% weighting in the NASDAQ 100 Big Tech index . Food for Thought : roughly 10% of the net S&P 500 advance from early 2019 has been generated by Apple alone.
Below is a graph of the uncharted territory Apple’s simple fundamental valuation has reached in 2020-21. On basic price to trailing metrics, the stock is valued at 2x to 8x its 10-year averages on earnings, sales, cash flow and book value! Peak Earnings in 2021-22?
If you knew nothing about Apple, and just reviewed the above chart, a rational experienced investor would instantly assume huge growth rates for the underlying business were just now beginning. Nope. Wall Street analysts are expecting only subpar/minor, if any real growth (adjusted for inflation) in the underlying business. Below are charts of the projected stagnation in annual EPS and revenues for Apple after 2021.
Analyst Earnings Projections Analyst Revenue Projections Source: Seeking Alpha
Even the jump in profit margins, which has helped produce the massive bump higher in the stock quote since 2019, can be read negatively for future pricing. What if margin pressures from supply-chain issues out of China (either from Omicron exploding in China or trade tensions with America expanding) raise costs more than competitors, and consumers globally slow spending decisions (falling from the record disposable income rate of 2021, artificially pumped by government stimulus programs). Both variable cost and demand pressures could drag down profit margins in 2022-23, making any net income “growth” in the business almost impossible. My worry is Apple should logically be trading near its LOWEST valuation on trailing results, if above-normal business growth trends have peaked, not many multiples of normal! Given Apple fails to deliver any uptick in EPS and sales during 2022, the stock could easily be marked down to reality. […]