Apple’s Revenue Woes Put Market-Leading Rally at Risk

(Bloomberg) — After blowout results from Microsoft Corp. and Meta Platforms Inc. spurred huge rallies in their stocks, there are concerns the bar has been set too high for Apple Inc.

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Not only does the iPhone maker trade at an elevated valuation to peers after a market-leading 29% rally in the year to date, but it also comes with a weaker growth outlook. Second-quarter results due after Thursday’s close are expected to show a 4.8% drop in revenue and a 5.8% slide in earnings, according to consensus analyst estimates, paving the way for a first year of declining sales since 2019.

“It isn’t as though the business is going downhill, but it is very highly valued, especially since we no longer have the perfect backdrop for tech,” said Daniel O’Keefe, who manages about $36 billion as a portfolio manager at Artisan Partners. “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.”

Compared with the stellar results from the likes of Microsoft and Meta, Apple’s report is likely to make for more sobering reading. UBS Group AG analysts warned on Monday that US iPhone demand had “notably softened” in March, while Bloomberg Intelligence expects the smartphone market to drop 4% this year, with weakness concentrated in the first half of 2023. A disappointing forecast from Qualcomm Inc. on Wednesday underlined concerns about smartphone demand.

Against that backdrop, analysts have been trimming their expectations. Consensus estimates have fallen for full-year revenue and earnings since Apple’s last report in February.

Not that such concerns are evident in the stock’s valuation. Apple trades at 26 times estimated earnings, well above its 10-year average of 18 and at a premium to both the Nasdaq 100 and the S&P 500 tech index. In a sign of how Wall Street is muted on the stock’s outlook, the average analyst price target suggests a return potential of just 4.6% over the next 12 months, the lowest among the market’s trillion-dollar companies.

“The risks are high, the stock is highly valued, if not overvalued, and the outlook doesn’t seem to be all that great,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Apple’s rally partly reflects how investors have turned to big tech amid turmoil in the banking sector, and JPMorgan Chase & Co. analyst Samik Chatterjee says the stock is likely to retain its safe-haven status, so long as its results don’t show a material deterioration in fundamentals.

The gain also reflects optimism that the Federal Reserve could be nearing the end of its rate-hike cycle, easing what was a major headwind to tech multiples in last year’s selloff. On Wednesday, the Fed raised interest rates by a quarter percentage point but hinted this may be the final move of the cycle.

“Large cap US stocks are pricing in a soft landing, and better-than-expected earnings do speak to the possibility of that outcome,” said Som Priestley, multi-asset solutions strategist at T. Rowe Price. “However, upside might be muted given where multiples are.”

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