WSJ: The looming downturn is NOT baked into Apple’s share price

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.

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15 Comments

  1. Mordechai Beizer said:
    “ Toni Sacconaghi of Bernstein estimates that less than 10% of Apple’s revenue is recurring—the least among big tech hardware makers.”

    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.

    6
    June 22, 2022
  2. Miguel Ancira said:
    I did not even read it, but I do not agree.

    2
    June 22, 2022
  3. Christopher McManus said:
    You would think the WSJ would employ the best analysts and reporters to cover the world’s biggest company.

    Nope

    6
    June 22, 2022
    • Fred Stein said:
      Great point.

      WSJ, NYT, WaPo, and others don’t understand the digital transformation. They’re blind.

      1
      June 22, 2022
  4. “has yet to see its resilience truly tested by a global recession.” Then the hack that wrote this dung goes on to mention how the iPhone “launched in 2007 right before the global financial crisis ushered in the last major recession…” WSJ editors failed along with the scribbler. WSJ was a useful tool, in the 1980s.
    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.

    5
    June 22, 2022
  5. Jerry Doyle said:
    “…. 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.”

    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.

    4
    June 22, 2022
  6. David Emery said:
    So what we have here is a journalist seeking clicks, citing a ANALyst who seeks clicks, withOUT checking that ANALyst’s track record. Hey, you can find justification for just about any position you want on the Internet. “Apple sales will fall off in 2022 because shipments of Apple devices are falling off the edge of the flat earth.”

    3
    June 22, 2022
  7. Jerry Doyle said:
    “…. My take: A) That last sentence was a cheap shot; Gallagher knows  the car is nowhere near ready to roll.”

    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.

    5
    June 22, 2022
    • Steven Philips said:
      My understanding (misunderstanding?) was that the CarPlay concept they showed off was a sometime in the future kind of thing. Maybe two or three years for SOME manufacturers to MAYBE adopt.

      1
      June 22, 2022
    • Spot on, Jerry. I was contemplating what Apple might charge Hyundai, Cadillac or Honda to eliminate entertainment, NAV & climate control software headaches & recalls car manufacturers risk now. Each spends millions on software now. X amount + Per unit license fees? 30% of the car manufacturer’s current software development costs?
      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!

      2
      June 22, 2022
  8. Neal Guttenberg said:
    I am glad I ate breakfast before reading this article. Seeing the muffins would have made me go get breakfast before finishing the article 😉

    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.

    1
    June 22, 2022
  9. Jerry Doyle said:
    I suspect Apple is striving to own the real estate inside every car on the road through its latest innovative, unique and all-encompassing Apple CarPlay software update strategy. This interface will become the connection for spearheading revenues until the Apple car arrives. Consumers used to Apple CarPlay’s unique and simplistic user software interface likely will desire or want to experience the premium Apple car hardware experience, too. The combination of Apple car and Apple CarPlay thus will offer-up that long sought after “iPhone-on-wheels.”

    2
    June 22, 2022
  10. Robert Paul Leitao said:
    Apple makes excellent products. Apple offers compelling services. Yes. As a global enterprise, Apple’s performance will be influenced by the rates of domestic and global economic growth. However, Apple’s biggest challenge at the moment is meeting existing demand for its hugely popular products, particularly at this time demand for Apple silicon-based Macs. Meanwhile, Apple continues to repurchase shares and the shares are trading well below most current price targets. It’s not like any of this is some kind of surprise.

    1
    June 22, 2022
  11. Gary Morton said:
    Author concedes that Apple managed through the last two recessions with flying colors, but posits a thesis that the company has not “really” managed through a recession because they had transformative product launches during those past downturns. Ergo they lack the experience to manage through one if a recession should come. The car may not be ready to roll, but the AR/VR device by all measures is coming next year. Moreover, the evolution of CarPlay, M2, M3, M4, iPhone 14, 15, 16, new services, and other products don’t stop selling in a recession, the value proposition just becomes more challenging. If you were placing a bet on the leadership team’s most able to manage through an economic downturn, should you listen to someone that tells you to ignore Cook and Company?

    1
    June 22, 2022

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