After Over A 40% Rally In 2023, Will Antitrust And iPhone Issues Hurt Apple Stock?

Apple (NASDAQ:AAPL) stock has witnessed a rocky start to 2024, declining by about 4% year-to-date, falling to about $185 per share. Apple has been impacted by analyst downgrades, amid concerns of weaker iPhone demand as well as a recent report from the New York Times about a potential antitrust case against the company.

There have been concerns about the demand for the iPhone. A recent report by Jefferies indicated that iPhone sales in China dropped by 30% in the first week of 2024, amid growing competition. Moreover, the report states that the declines come despite aggressive discounting. That said, Apple could offset some of the impact of potentially weaker Chinese sales, given the growth it is seeing in emerging markets such as India where financing plans and trade-in programs are helping drive demand. Moreover, higher average selling prices in markets such as the U.S., where users are opting for more premium devices such as the iPhone Pro Max, could also help to an extent.

Apple’s computing products have seen headwinds of late as demand from the remote working and learning trend has eased following the pandemic. For perspective, Apple’s Mac revenue fell 34% to $7.6 billion in Q4, while iPad revenue stood at $6.4 billion, down 10%. Overall, things are expected to have remained mixed over the holiday quarter as well, with Apple guiding that overall revenue would remain flat with the year-ago period.

The New York Times reported last week that the U.S. Justice Department could file an antitrust lawsuit against Apple during the first half of 2024.  The suit is likely to be focused on Apple’s tightly controlled ecosystem, which favors better interoperability among Apple devices and services. That said, we do not believe the lawsuit will have a material impact on the company in the near term given that antitrust cases are typically drawn out.

Looking over a longer period, AAPL stock has seen extremely strong gains of 40% from levels of $130 in early January 2021 to around $185 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in AAPL stock has been far from consistent. Returns for the stock were 35% in 2021, -26% in 2022, and 49% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that AAPL underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, NVDA, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAPL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

There are some positives for Apple stock. The big generative AI trend could help Apple, as it equips more of its devices with on-device AI capabilities. Apple’s services business also remains a bright spot for the company. Services sales grew 16% to $22.3 billion in Q4 FY’23, returning to double-digit growth, after growing by single-digit levels in the previous two quarters.

We value Apple at about $178 per share, which is slightly below the market price. We think Apple’s valuation is a bit rich with the stock trading at about 27x 2024 consensus earnings, which is slightly high compared to historical levels. Moreover, revenue growth is also likely to remain in mid-single digit levels over the next year, per consensus estimates.  See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

[1] Month-to-date and year-to-date as of 1/9/2024
[2] Cumulative total returns since the end of 2016

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