Why Apple Stock Is A Safe Haven In An Uncertain Market

The markets are having a tough couple of weeks, with the S&P 500 declining by about 7% over the past month, while the Nasdaq-100 has declined by 12.5%. Even Apple (NASDAQ:AAPL) stock, which is viewed as a safe haven of sorts, hasn’t really been immune to the sell-off, declining by about 8% over the last month. The recent sell-off comes amid concerns about a recession in the U.S. after a tough jobs report for July. Moreover, consumers have also been feeling the pinch of high interest rates and inflation with pandemic-era savings dwindling. However, we think Apple stock could hold up better than the broader market if there is an economic downturn.

Strong Financial Performance And Position 

Apple’s revenues are expected to scale to record highs this year,  with sales projected to grow 9% to $390.27 billion, per consensus estimates, led by growth in emerging markets such as India. Apple has also been astute at managing its costs. Apple also grew its gross margins to 46% for the first nine months of this fiscal year, reaching near all-time highs, up from about 44% in the year-ago period, driven by a more favorable product mix, and higher service sales. Investors treated Apple stock as a safe haven of sorts through the Covid-19 era with its stock price and price to earnings multiple expanding to multi-year highs. This trend could continue in the currently uncertain economy as well, considering Apple’s strong balance sheet and the sizable share buybacks. Although Apple is far from a risk-free investment, its $115 plus billion in cash and marketable securities and close to $70 billion in stock buybacks over the past nine months should support its stock price and mitigate some risk for investors.

Unique Position In The Generative AI Space

Part of the current technology rally has been driven by excitement surrounding generative artificial intelligence.  While Apple is a bit late to the party, with its new Apple Intelligence offering (which includes upgrades to its Siri voice assistant, new writing assistance tools, calculator features, and image generation), the company’s implementation of AI appears impressive. This is in contrast with many other big tech players who have been yet to find a solid use case or business model from generative AI. Now Apple has limited compatibility of the new software features to its top-end devices such as the iPhone 15 Pro and iPads with M-series processors, meaning that the vast majority of Apple consumers will need to upgrade devices to get access to AI capabilities. Moreover, unlike other big tech players who have set aside tens of billions of dollars on AI related capex outlays, Apple is likely to leverage more on-device processing.

AAPL stock has seen strong gains of 60% from levels of $130 in early January 2021 to around $210 now, vs. an increase of about 40% 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, Arista Networks (NYSE:ANET), another company that also benefits from generative AI, has seen its stock surge by 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, will Apple stock rally further going forward?

We think there is some upside for Apple, with our $219 price estimate for the stock coming in slightly ahead of the current market price. There are a couple of reasons for our positive stance on Apple. While continued revenue growth and solid margin expansion should drive Apple’s profits, shareholder returns could be magnified by Apple’s massive stock buyback program. Apple has bought back an average of about 5% of its stock each year over the last five years. Apple’s Valuation also appears reasonable, relative to historical levels. The stock trades at a P/E of about 28x currently, based on FY’25 consensus earnings. This is below the 31x the stock traded at in 2021 and 38x in 2020. This could make Apple reasonably compelling in the current market. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.

[1] Returns as of 8/8/2024
[2] Cumulative total returns since the end of 2016

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