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Shares of Apple (AAPL) climbed to an 8-month high Wednesday and are up +29% for the year. That has pushed the stock to an elevated valuation that may be tested after today’s close when it reports Q2 earnings results. The consensus is for Apple’s Q2 revenue to fall by -4.8% and earnings to slide by -5.8% as sales fall for the first time since 2019.
Some analysts are concerned that the rally in Apple may have gotten ahead of itself. Artisan Partners said, “Apple has to grow a lot to generate good returns from here, and there’s no reason to think the growth it has seen over the past several years will continue at that pace.” Also, UBS Group AG on Monday warned that U.S. iPhone demand had “notably softened” in March.
Concern about smartphone demand may also undercut earnings expectations for Apple going forward. Bloomberg Intelligence projects that the smartphone market will drop -4% this year, with weakness concentrated in the first half of 2023. Adding to smartphone demand concern was Wednesday’s disappointing quarterly earnings report and profit forecast from Qualcomm (QCOM) that signaled sluggish demand for mobile phones.
Against the backdrop of weakening smartphone demand, analysts have been cutting their expectations. As a result, consensus estimates have fallen for full-year revenue and earnings since Apple’s last earnings report in February.
Despite reduced earnings expectations, valuations remain frothy. Apple trades at 26 times estimated earnings, well above the 10-year average of 18 and a premium to the Nasdaq 100 ($IUXX) (QQQ) and S&P 500 tech index. In a sign of lowered expectations, Apple's average analyst price target is for a potential return of +4.6% over the next 12 months, the lowest among the market’s trillion-dollar companies.
Apple’s rally this year partly reflects its status as a safe haven amid turmoil in the banking sector. JPMorgan Chase said Apple would likely retain that status as long as its results don’t show a material deterioration in fundamentals. Apple’s gain also reflects optimism that the Federal Reserve could be at the end of its rate-hiking campaign, easing what was a major headwind to tech stock multiples. However, T. Rowe Price warns that Apple’s “upside might be muted given where multiples are.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
