From Dan Gallagher’s “Apple Isn’t Priced for a Recession” posted Wednesday by the Wall Street Journal:
The “new” Apple isn’t really new. But it is new enough that the 46-year-old company’s modern incarnation has yet to see its resilience truly tested by a global recession.
Investors currently aren’t baking one in. Apple’s share price has indeed taken a hard hit over the past few months, along with the rest of the tech sector. But it has still outperformed the Nasdaq and most of its tech peers this year, and is one of the few among them in positive territory for the past 12 months…
The company has indeed managed through recessions in the past, though the past two happened to coincide with product launches that ultimately remade the company once focused on niche computers. Apple launched its first iPod digital music player in late 2001 in the midst of the recession sparked by the first dot-com bust, while the first iPhone launched in 2007 right before the global financial crisis ushered in the last major recession…
While Apple’s revenue base is now 15 times larger and includes a growing services arm, hardware still accounts for more than 80% of the company’s total revenue. Even the services side has a large transactional component from categories such as App Store downloads. Toni Sacconaghi of Bernstein estimates that less than 10% of Apple’s revenue is recurring—the least among big tech hardware makers.
Apple may not be as immune to a sharp global downturn as many seem to think. Analysts currently expect Apple’s revenue to be flat year over year in the June-ending quarter, mostly as a result of the restrictive Covid lockdowns in China that affected both production and demand for the company’s devices. But that is expected to be short-lived; Wall Street projects Apple will return to growth in the rest of this calendar year and next. Morgan Stanley, however, warned last week that 55% of high-income respondents in its most recent consumer survey expect to cut back spending on electronics in the next six months because of inflation. The broker warned that Wall Street’s estimates for Apple “still need to come down” even as it retains a buy rating on the stock. Unless, of course, Apple finally has that car ready to roll.
My take: A) That last sentence was a cheap shot; Gallagher knows the car is nowhere near ready to roll. B) I smelled Toni Sacconaghi’s take even before Sacconaghi was named.
See also:
Can I call bogus on this? What do you call it when the customer base regularly upgrades to a newer version? One may posit that the upgrade cycle may lengthen but those are certainly recurring revenues.
Nope
WSJ, NYT, WaPo, and others don’t understand the digital transformation. They’re blind.
Reading between the lines, watch Apple release a popular VR headset & FDA-approved hearing aids just as an actual Recession gets going in 2023, again lifting profits through an economic downturn.
Apple is poised to roll out its BNPL program which will serve as an added incentive for consumers to upgrade their devices. Additionally, I believe Apple is thinking seriously about unleashing an all-new subscription program that will facilitate consumers desiring to upgrade their devices. I am confident Apple already is addressing inflation’s impact on the Apple consumer through offering more new, unique and innovative methods for upgrading to new devices going forward.
Perhaps, but it matters little as Apple’s new Car Play software will drive added revenues in the near term until the Apple Car arrives. That long has been Apple’s car strategy since some Apple engineers exited over the lack of an Apple car entry to compete with Tesla. If we can believe the rumors, Cook agreed to build the car to tap into the $2 Trillion car industry but in the interim, compete with Tesla through aggressive Apple CarPlay software installation inside every car manufacturer’s vehicle. Consumers would assimilate into the Apple eco-system inside their respective cars and by the time that assimilation occurred, Apple rolls out its new Apple Car. There is good revenue now to be had through the Apple CarPlay software installation inside vehicles until the Apple car arrives. So, it matters little now that Apple has no Apple car entry. It has the new, innovative and unique Apple CarPlay that consumers will demand for desiring the experience of that ecosystem.
A logical next step is the Apple car hardware module with an Apple M4 Car SoC replacing existing overpriced on-board computers.
Finally you arrive at CarPlay 4.0 EV, custom software & hardware capable of seriously extending range & overall battery life. If Apple’s software & silicon combo vastly exceeds current capabilities, it becomes a competitive advantage. Like when AT&T had iPhone exclusivity. Finally, 50% of all transport (buses, trucks, cars) end up with some Apple components. Antitrust regulators then throw up their hands and abandon all hope!
As to the meat of the news piece, I agree with many of the comments made before mine, so I don’t have anything to add.
IMHO, a US recession is very much baked into these stock prices. Which raises the question; what happens if the recession turns out to be vaporware?
Are we in for an extended period of treading water until the economic picture clarifies? If so, that will totally play into Apple’s buyback strategy. And relative to companies with little or no buyback strategy, that means Apple’s real value per share is increasingly pulling away from the the rest of the pack.