Apple, the world’s inaugural $3 trillion company in June, faced a shift in fortunes by December 14, 2023, when its stock reached a record high of $197.86, propelling its market cap to $3.08 trillion. However, the current scenario sees Apple’s stock trading around $170 per share, resulting in a market cap of $2.63 trillion. In an unexpected turn, Microsoft, surpassing Apple’s market cap in January, is now valued at $2.99 trillion. This prompts an examination of why Apple experienced this decline over the past three months, the potential for a rebound in 2024, and whether it can reclaim its $3 trillion status by 2025.
Why did Apple lose its luster?
Apple faced a downturn in investor sentiment this year, driven by several key factors. Firstly, its flagship product, the iPhone, which contributes significantly to its revenue (58% in the latest quarter), experienced a slowdown. iPhone sales declined by 2% in fiscal 2023 and grew by only 6% in the first quarter of fiscal 2024 due to the conclusion of the 5G upgrade cycle. This deceleration was further exacerbated by fierce competition and macroeconomic challenges in China, resulting in a 24% year-over-year drop in iPhone sales in the first six weeks of 2024.
Secondly, Apple struggled to compensate for the iPhone slowdown with its other product lines. Mac sales plummeted by 27% in fiscal 2023 amid a broader slowdown in the PC market, while iPad sales also declined during both periods. Apple Watch sales faced a temporary halt in December due to a patent dispute, and the Vision Pro, a niche gadget for tech enthusiasts, has limited mainstream appeal. The company’s decision to abandon its decade-long plans for an electric car further impacted its product portfolio. Analysts anticipate a modest 1% increase in revenue and a 7% rise in earnings for Apple this year.
Thirdly, Apple’s valuation was inflated, driven by a flight toward safe-haven stocks amid rising interest rates and macroeconomic uncertainties. Despite a year-to-date decline, Apple’s stock remains relatively high at 26 times forward earnings, and its meager forward dividend yield of 0.6% may not provide significant downside protection.
Lastly, the European Commission imposed a substantial 1.8 billion euro ($1.95 billion) fine on Apple for preventing streaming music rivals, such as Spotify Technology, from informing users of cheaper payment options outside its App Store. While Apple can absorb the fine, it raises concerns about potential regulatory scrutiny on its services segment, a key driver of its long-term growth with over 1 billion paid subscribers.
Will Apple lose its premium valuation?
Apple’s short-term outlook appears uncertain. Despite CEO Tim Cook’s commitment to groundbreaking advances in generative artificial intelligence (AI), skepticism lingers about whether these developments will sufficiently differentiate Apple from competitors like Microsoft’s Copilot and Google Assistant. The addition of generative AI features to Spotlight, Apple’s integrated search tool, is anticipated, but its impact on market dynamics remains unclear.
Should Apple’s AI initiatives fail to translate into substantial sales growth in the coming quarters, its stock may lose its premium valuation and be reassessed based on its near-term growth prospects. Analysts project a modest compound annual growth rate (CAGR) of 4% for revenue and an 8% CAGR for earnings per share (EPS) from fiscal 2023 to fiscal 2026. In comparison, IBM, focused on hybrid cloud and AI expansion, is expected to grow revenue and EPS at CAGRs of 4% and 6%, respectively, during the same period. IBM, with a forward yield of 3.4%, trades at 22 times this year’s earnings.
A hypothetical revaluation of Apple at a similar multiple (22 times forward earnings) could result in a 15% drop in its stock to the mid-$140s, lowering its market cap to $2.2 trillion. To regain its $3 trillion valuation by early 2025, Apple needs to demonstrate tangible growth drivers and innovation. While the short-term challenges persist, Apple’s potential to revitalize itself with new products and services suggests it might overcome the current uncertainties, making it premature to dismiss the tech giant as a mature entity devoid of growth opportunities in the long run.
