After impressive financial results from Microsoft Corp. and Meta Platforms Inc. caused significant jumps in their stock prices, analysts are now worried that the expectations for Apple Inc. may be set too high. Not only does the company have a high valuation compared to its peers, with a 29% rally in the year-to-date, but it also has a weaker growth outlook. Analysts predict that Apple's second-quarter results, due out after Thursday's closing bell, will show a 4.8% decrease in revenue and a 5.8% decrease in earnings, leading to its first year of declining sales since 2019.
Investment professionals are increasingly concerned about Apple's valuation, with some suggesting that the growth the company has experienced over the past few years may not continue at the same pace. Daniel O'Keefe, who manages around $36 billion as a portfolio manager at Artisan Partners, notes that "Apple has to grow a lot to generate good returns from here, and there's no reason to think the growth it has seen over the past several years will continue at that pace."
Compared to the impressive results from Microsoft and Meta, Apple's report is likely to be less optimistic. UBS Group AG analysts have warned that US iPhone demand had "notably softened" in March, while Bloomberg Intelligence predicts that the smartphone market will fall by 4% this year, with the weakness concentrated in the first half of 2023. A disappointing forecast from Qualcomm Inc. on Wednesday has only served to underline concerns about smartphone demand.
Analysts have been reducing their expectations for Apple, with consensus estimates for full-year revenue and earnings falling since the company's last report in February. Despite these concerns, Apple continues to trade at 26 times estimated earnings, well above its 10-year average of 18 and at a premium to both the Nasdaq 100 and the S&P 500 tech index. 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.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, notes that "the risks are high, the stock is highly valued, if not overvalued, and the outlook doesn't seem to be all that great."
However, Apple's rally partly reflects how investors have turned to big tech amid turmoil in the banking sector. JPMorgan Chase & Co. analyst Samik Chatterjee suggests that the stock is likely to remain a safe haven, as long as its results do not show a material deterioration in fundamentals. The gain also reflects optimism that the Federal Reserve is nearing the end of its rate-hike cycle, easing what was a major headwind to tech multiples in last year's selloff. On Wednesday, the Fed raised interest rates by a quarter percentage point but hinted that this may be the final move of the cycle.
Som Priestley, multi-asset solutions strategist at T. Rowe Price, notes that "large cap US stocks are pricing in a soft landing, and better-than-expected earnings do speak to the possibility of that outcome. However, upside might be muted given where multiples are." Analysts are raising earnings per share estimates for the Nasdaq 100 Index, indicating that confidence is starting to return. The increase in forecasts provides some support for this year's 19% rally in the tech-heavy gauge.