Apple (AAPL) is an American multinational electronics hardware and software company. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
iPhone 13 Demand Decrease
The initial thought behind the forecast in diminishing iPhone 13 sales was supply disruptions, but Apple publicly admitted that it’s facing demand issues.
Management has officially cut its full-year production plan by 10 million units after communicating to suppliers that consumers may skip upgrading to hard-to-find phones.
The Dynamics of Demand
Apple’s higher-end hardware facilitates software downloads and is classified as Veblen goods due to its pricing category. Veblen goods sell better when their prices increase because they’re considered a “status symbol buy” with little income elasticity involved.
However, even Veblen goods can experience declining demand as GDP and disposable income contracts. Although GDP and disposable income spiked in early 2021, it’s long been anticipated that economic growth will taper down as soon as expansionary government policies have subsided.
I think Apple was arrogant in this regard and didn’t consider economic conditions as determining factors in its demand outlook. The company simply assumed its sales growth would continue to advance due to its market position.
Page Visits
By utilizing TipRanks’ new tool that tracks company webpage visits, it’s clear that there’s been a downward trend in customer interest along with diminishing government stimulus.
The chart shows that although there has been an uptick in page visits between July and September, visits have decreased by almost 16% year-over-year.
Inventory
A helpful way to analyze a company’s expectation of future demand is to look at how it’s running its inventory.
According to the firm’s latest financial statements, inventories have piled up by 62%. Although this could’ve been due to panic stockpiling amid supply-chain glitches, my bet would still be that Apple expected much higher demand.
To add more substance to the argument is the fact that the company’s days of inventory on hand ratio, which currently stands at 11.3, is the highest it’s been, signaling poor forecasting.
Valuation
The stock is significantly overvalued. Apple can still be considered a growth company, and it’s thus best to look at its price to sales and price to cash flow ratio to analyze the stock price.
Relative to its five-year averages, the company’s price-to-sales and price-to-cash-flow ratios are trading at premiums of 51.7% and 55%, respectively. Analysts also aren’t expecting an encouraging sales period for Apple, with its three to five-year EPS CAGR projected to be 28.7% lower than its sector peers.
Wall Street’s Take
Turning to Wall Street, Apple has a Strong Buy consensus rating, based on 22 Buys, five Holds, and one Sell assigned in the past three months. The average Apple price target of $168.44 implies 4.1% upside potential.
Concluding Thoughts
I’d be throwing caution to the wind if I were an Apple investor. The past two years have provided many tech firms with systemic support causing their stocks to be overpriced.
In addition, it doesn’t seem as though the company anticipated the latest drop in iPhone demand, signaling lackluster management and potential complacency.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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