As problems worsen, investors in Apple risk a $340 billion hole

 As problems worsen, investors in Apple risk a $340 billion hole

The claim that Apple Inc., the most valuable corporation in the world, is immune to dangers associated to economic turmoil is being called into question by a steady stream of negative news about the firm.

Tepid sales of Apple's new iPhone models in China have raised questions about the company's ability to maintain its high valuation and prevent a run of four straight quarters of declining revenue, which would be the worst stretch since 2001. At the same time as the business is coping with political issues with China and overheated gadgets, KeyBanc became the most recent company to lower the stock this month. 

James Abate, chief investment officer at Centre Asset Management, believes that a gap is impossible to overlook between Apple's lack of growth and the high price of its shares.

"Apple has some of the lowest growth among the megacaps, but the stock does not have de-rated to multiples it saw in past times when it wasn't growing," he said in an interview. Given Apple's "systemic" significance to the stock market, according to Abate, investors should use put options to protect themselves against the value risk of the company.

On Thursday, Apple gained 0.6%, reversing four consecutive days of losses.

Shares have fallen 10% since the end of July, while the Nasdaq 100 Index has down 5.6% during that time. More than $320 billion in market value has been lost as a result of the downturn, yet Apple continues to be the largest constituent of the S&P 500 Index, making up more than 7.1% of the index's weight.

It's hard for stock investors to ignore this market effect, but alternative megacaps could have more alluring growth prospects and trade at more affordable multiples.

"You can make a compelling foundational case for Amazon as a margin development story, for Microsoft and Nvidia as participants in the artificial intelligence craze, or for Alphabet and Meta weathering a slowdown in consumption advertising, but Apple has shown no revenue growth for some time," Abate added. "It's not like Cisco in 1999, which was about to plunge off a cliff, but if there was a significant market disruption, stocks like Apple would likely bear the brunt of it," the speaker said.

Early November will witness the release of the company's fourth-quarter earnings, and experts anticipate a 1% decline in sales from the same time last year. According to Bloomberg Intelligence, the S&P 500 IT sector as a whole saw revenue increase by 1.5% this quarter.

In light of this, Apple trades at a ratio of 26.6 times expected profits, which is higher than both the Nasdaq 100 Index's multiple and its own historical average. Additionally, it trades at a premium in terms of forward sales despite having a free-cash-flow yield that is lower than 3.7% compared to the 6.4% average over the last 10 years.

Even while Apple's revenue growth is anticipated to pick up in its 2024 fiscal year, the rate is predicted to be much slower than in previous years, and new product categories like its Vision Pro headset aren't anticipated to quickly become significant drivers.

Some people have already retreated because of this. KeyBanc Capital Markets recently downgraded its recommendation on the company from buy to hold, citing concerns with the valuation and future growth. 

The stock's consensus rating, which represents the proportion of buy, hold, and sell recommendations, has declined 9% from its high in December as a result of many downgrades this year. By far the lowest percentage among megacaps, less than two-thirds of the analysts monitored by Bloomberg advocate purchasing.

According to Michael Kirkbride, portfolio manager at Evercore Wealth Leadership and Management, "there are always challenges, though this does seem like a trickier period in particular with the multiple being at the upper limit of the historical range." "While we would love to buy at a lower price, we are very cautious about adding to positions here."

Despite this, Kirkbride said that Apple merits a second chance given its track record of success in overcoming adversity.

"Apple continues to be a top brand internationally, it has unmatched supply-chain knowledge, and because of its free cash flow, it traditionally offers a different return on investment than other businesses. It's worthwhile to stay for it.