Apple Isn’t Recession Proof. The Stock Could Have a Tough 2023.

I’ve generally been pretty bullish in this column about the outlook for Apple stock (ticker: AAPL). But when I assess the situation now, I see reasons for concern—growth is slowing, and might go negative, and valuation is elevated. Apple shares look vulnerable.

The stock is down about 15% this year. That would be a bummer in most years, but in a tough stretch for tech, Apple has outperformed its peers, and by a wide margin.

Microsoft

(MSFT) is off 31%,

Alphabet

(GOOGL) is down 35%,

Amazon.com

(AMZN) has tumbled 43%—and

Meta Platforms

(META) has plunged 67%. Apple is now worth more than Microsoft and Meta combined.

But Apple’s growth rate is rolling over. In fiscal 2021, Apple grew revenue 33%, the best increase since 2012, as demand for Macs and iPads soared. Compare that to fiscal 2019, the last year before the pandemic, when revenue declined 2.2%. But much like

Zoom Video Communications

(ZM),

Peloton Interactive

(PTON), and Amazon, Apple is seeing its pandemic boost wear off. Brace for a down year in 2023.

That might not be a big issue if the stock were cheaper. But Apple trades at 24 times projected profits for the next 12 months—right in line with Microsoft, which is growing faster than Apple—and well ahead of the

S&P 500’s
multiple of about 18 times.

To be sure, it’s helped Apple shares that earnings have been less terrible than those of the other tech giants. In the September quarter, Apple grew sales 8% from a year earlier, to $90.1 billion, with profits of $1.29 a share, up 4%. It beat Wall Street estimates on both measures.

Amazon, Alphabet, Microsoft, and Meta all reported rotten quarters; Apple’s modest beat looked almost spectacular in comparison. But troubles lurked below the surface.

Apple exceeded estimates entirely because of much stronger-than-expected Mac sales—$11.5 billion, up 25% from a year earlier, and $2.2 billion above Wall Street estimates. The big beat reflected easing supply constraints and followed a 10% year-over-year decline in the June quarter, when parts shortages made it impossible for Apple to meet demand. On the other hand, Apple missed expectations for both iPhone and iPad sales, while its services revenue fell short of consensus estimates by almost $1 billion, as advertising and gaming revenue softened.

On the post-earnings call, Apple Chief Financial Officer Luca Maestri warned that sales would slow in the December quarter, due in part to headwinds from the strong dollar. He also said Mac sales would be down substantially, given a difficult comparison with the year-ago period, when new models based on the M1 processor made their debut. He said the services business would grow, despite the macro picture weighing on both advertising and gaming.

Two weeks ago, that picture darkened further. Apple took the unusual step of disclosing that the assembly facility for iPhone 14 Pro and Pro Max phones in Zhengzhou, China, which is run by its manufacturing partner Foxconn, is operating at “significantly reduced capacity” due to a Covid outbreak. Apple last made a statement of that ilk in February 2020, as the initial Covid-19 wave rolled through China.

Apple said that both the Pro and Pro Max continue to see strong demand, but that shipments would be below previous expectations—it didn’t say for how long—and that buyers were going to see increased delays. When I checked this past week, wait times for both the Pro and Pro Max were running 41 days, putting delivery a few days after Christmas. There is better supply—and no wait at all—for the lower-end models. But demand for the base iPhone and the larger iPhone Plus has been soft, with reports that Apple has cut production for both.

Remarkably, Apple has rallied 9% in the two weeks since it issued the statement about the iPhone production issues, boosting the company’s market value by nearly $200 billion, more than the current total valuation of

Walt Disney

(DIS). Maybe investors aren’t doing the math.

Wall Street estimates have been coming down for the December quarter. Consensus now calls for revenue of $125.7 billion, up a scant 1.4%, with profits of $2.04 a share, down from $2.10 a year earlier. Barring rapid improvement in iPhone supply, Apple could suffer a year-over-year revenue decline, the first since the March 2019 quarter. Jefferies analyst Kyle McNealy estimates the iPhone assembly issues are cutting Apple’s revenue by about $1 billion a week.

Meanwhile, as Maestri made clear on the last call, Apple is not immune to an economic slowdown. The average iPhone price is pushing $900, and the most powerful version runs $1,600. People love their iPhones, but they also like to eat, pay the rent, and fuel up their cars. To think sales won’t be affected by a recession seems unrealistic.

“People want to think iPhones are a consumer staple,” says Dan Niles, who runs a tech-focused hedge fund. But the coming year could be a bit of a surprise, he says of Apple’s durability: “I think they will have a down revenue year in 2023.” Apple had fiscal 2022 revenue of $394 billion; for 2023, analysts call for a 3% rise to $407 billion, with iPhone sales up less than 1% to $207 billion. If I were a betting man, I’d take the under.

Write to Eric J. Savitz at [email protected]