Will Apple Stock Fall?

After spending 2023 on a substantial upswing, Apple (NASDAQ:AAPL) has gotten off to a shaky start in 2024. The stock is off 5.6% YTD, and the losses are beginning to weigh on investors.

Notably, Warren Buffett, long an ultimate bull on Apple, appears to have sold off about 13% of Berkshire Hathaway’s massive stake in the company. While that may not sound like a lot it’s almost half of the original invested principal from Buffett’s original 2016 investment.

What’s worrying Apple shareholders is whether the stock is set to fall further before a recovery can begin?

What Headwinds Are Working Against Apple?

Falling net income and revenue represent the most significant problems Apple is having. In the Q1 earnings report, the company revealed that revenues slid by 4% year-over-year. Meanwhile, earnings per share reached $1.53, a record for the quarter.

This EPS number, however, obscures a less positive trend in actual earnings. Even though the earnings per share reached a quarterly record, net income fell by 2.2%.

This seeming contradiction reflects Apple’s ongoing share buyback program, which has steadily pared back the total number of outstanding shares.

While higher per-share earnings are obviously a positive for investors, the company’s falling net income may make it less attractive from a growth perspective if management can’t turn the current trend around.

Behind the numbers, Apple may also be running out of the innovative new ideas that have historically propelled its growth. Last year’s launch of the iPhone 15 drew backlash from longtime Apple fans, many of whom argued that little had changed from the phone’s 14th generation.

Likewise, sales of its Vision Pro VR have fallen off significantly after an initially promising release. Right now, there doesn’t appear to be a radical innovation on the horizon that is primed to boost Apple’s performance.

A final challenge for Apple is increasing competition in Asian markets. While the iPhone is still massively popular in China, sales declined 8% year-over-year in Q1. Late last year, Chinese smartphone major Huawei demonstrated its ability to domestically produce 5G-capable chips.

While Huawei’s chips still lag American technology by several years, the drive for home-grown advanced semiconductors in China will likely put additional pressure on Apple’s sales there in the coming years. The company also saw a 13% decline of Japanese sales amid weaker demand for smartphones overall.

The Good News on Apple

None of the problems facing Apple are benign, but there’s still a lot to like about the company overall. To begin with, Apple’s trailing 12-month profit margin of 26.3% is highly attractive. Return on equity has been outstanding over the same period, reaching nearly 150%.

This positive profitability is bolstered by the high probability of further, albeit more modest, growth in the future. Over the coming 3-5 years, analysts foresee compounded earnings per share growth to continue at about 10.7%.

As with current EPS, it should be noted that this number will reflect substantial ongoing share repurchases. The company announced a $110 billion share buyback alongside its Q1 earnings, the largest repurchase authorization in corporate history.

This buyback program will likely be accompanied by further increases to Apple’s dividend. Right now, AAPL shares yield 0.5%.

With a payout ratio of just 14.9%, though, management has much more room to increase distributions. This may provide the company with another mechanism for bolstering shareholder returns in addition to share buybacks.

Apple’s financial position is also still extremely strong. Cash on hand as of the end of Q1 totaled $73.1 billion, an increase of over 42% from a year earlier. Long-term debt fell 4.6% over the same period, demonstrating Apple’s ability to bulk up on cash while managing and even reducing debt.

Finally, Apple is without a doubt still dominant as both a service provider and a maker of consumer electronics. As management noted in the earnings report, the total base of devices is at an all-time high. This provides Apple an enormous ecosystem in which to introduce new products and services while maximizing value from its existing ones. Apple controls nearly 60% of the US smartphone market, with no other company eclipsing 25%.

Is Apple Overvalued?

On the surface, at least two of Apple’s metrics signal overvaluation. The first is its price-to-sales ratio, which stands at a very high 7.7x. The second is price-to-earnings-growth ratio, which is currently 2.2x.

These ratios, however, may not paint the full picture of Apple’s valuation. At 27.8, the company’s forward price-to-earnings ratio is higher than the S&P 500 average of 20.2.

However, Apple’s exceptional profitability and its potential for further growth likely justify this premium. Taking this into account, it’s likely that Apple is more or less priced fairly at the moment.

Will Apple Stock Fall?

Despite earnings report jitters, analysts do not expect Apple stock to fall but instead to rise to $200 per share. More than 60% of the analysts covering the stock still rate it as a buy, suggesting that the smart money still sees upside coming from Apple in the future.

Indeed, several major investment banks have increased their target prices for AAPL in the wake of the Q1 earnings report. Bank of America upgraded its price target from $225 to $230, while Morgan Stanley raised its from $210 to $216.

It’s undeniable that greater competition in China, declining revenue and earnings and seemingly stagnant innovation are all problems for Apple. However, the company remains a dominant force in consumer electronics and is still highly profitable. Management is also rapidly distributing cash to its shareholders, a fact that could keep total returns increasing for several years.

Although Apple may appreciate at a slower pace from here on out, it’s difficult to see the stock falling further and staying depressed in the long run. Even with high multiples, Apple seems more or less fairly valued at current prices.

As share buybacks continue to improve earnings per share, it’s likely that the value of remaining shares will keep rising. Investors may not see massive returns from AAPL going forward, but it seems probable that the stock still has the ability to keep pace with the market. If future innovations can renew net income growth, those who hold the stock through this somewhat stagnant period may see even better returns in years to come.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.