Apple’s revenue woes jeopardize market-leading rally

Not only does the iPhone maker trade at an elevated valuation relative to its peers after a market-leading 27% rally so far on the year, but it also comes with a weak growth outlook. Second-quarter results are expected to drop 4.8% in revenue and 5.8% in earnings after the close on Thursday, according to consensus analyst estimates, paving the way for the first year of sales declines since 2019 .

“It’s not that the business is going downhill, but it’s overpriced, especially since we don’t have the right background for the technology now,” said Daniel O’Keefe, who serves as a portfolio manager at Artisan. manages $36 billion in partner. “Apple will have to generate a lot of growth to generate decent returns from here, and there’s no reason to think that the growth it’s seen over the past several years will continue at that pace.”

Shares fell 1.5% on Thursday.

Compared to spectacular results from the likes of Microsoft and Meta, Apple’s report is likely to be more grim reading. Analysts at UBS Group AG warned on Monday that US iPhone demand had “particularly softened” in March, while Bloomberg Intelligence expects the smartphone market to decline by 4% this year, the first half of 2023 I will focus on weakness. A disappointing forecast from Qualcomm Inc. on Wednesday underscored concerns about smartphone demand.

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

Not that such concern is 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 S&P 500 Tech indexes. In a sign of how muted Wall Street is 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 look that great,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.

Apple’s rally partly reflects how investors have turned to the big tech amid turmoil in the banking sector, and JPMorgan Chase & Co. analyst Samik Chatterjee says the stock’s safe-haven status should be maintained. Likely to be kept, till it shows results. Material decline in fundamentals.

The gains also reflect optimism that the Federal Reserve may be nearing the end of its rate-hike cycle, which was a major headwind for tech multiples in last year’s selloff. On Wednesday, the Fed raised interest rates by a quarter percentage point but signaled that this could be its last move of the cycle.

“Large-cap US stocks are pricing in a soft landing, and better-than-expected earnings speak to the likelihood of that outcome,” said Mon Priestley, multi-asset solutions strategist at T. Rowe Price. Mut is given where are multiples.”