Weak iPhone 16 Sales Don’t Tell The Whole Story For Apple Stock

Apple stock (NASDAQ: AAPL) has remained largely flat over the past month, underperforming the Nasdaq-100, which gained about 4% in the same period. The company recently launched its iPhone 16 series, and early signs suggest weaker-than-expected demand. For instance, Morgan Stanley estimates that the average lead time for iPhone 16 orders is around 15.2 days, compared to 25.7 days for the iPhone 15 and 18 days for the iPhone 14 series within the first 11 days after Apple started taking orders. But should investors be concerned? We don’t think so.

It’s important to note that the shorter lead times could be attributed to improved supply chain conditions rather than weak demand. Unlike the last two years, when Apple faced supply constraints due to post-Covid semiconductor shortages, supply has likely caught up. This could mean Apple has simply ramped up production to meet initial demand more efficiently. The iPhone 16 lineup, while solid, offers relatively incremental improvements over last year’s models—mainly camera and processor upgrades. The Pro models come with slightly larger screens, but the real game-changer for this upgrade cycle lies in the upcoming Apple Intelligence software updates. These features, which include enhancements to Siri, new writing assistance tools, and AI-powered image generation, are expected to roll out gradually over the next few quarters. Many customers may be holding off on buying until these features are fully available, potentially driving an uptick in sales later in the cycle. The Apple intelligence features could eventually drive an upgrade cycle. Although primarily a software update, these AI capabilities will be exclusive to the iPhone 16 and 16 Pro models. The only exception is last year’s iPhone 15 Pro, which will also receive the update. This limited backward compatibility is likely to create an incentive for users of older iPhones to consider upgrading.  Another factor that could work in Apple’s favor is the improvement in U.S. wireless carrier deals for the iPhone 16 Pro. Trade-in credits for the Pro models are higher compared to last year, which could drive more customers toward these premium devices. Given that the Pro models carry higher margins, this could boost Apple’s profitability in the longer term.

The increase in AAPL stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 35% in 2021, -27% in 2022, and 49% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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?

Apple’s revenues are expected to scale to record highs this year,  with sales projected to grow 9% to $390 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. Apple’s solid balance sheet and services business cash cow could make the company a relatively safe haven in an uncertain market. See our breakdown of Apple’s services business revenues.  We have a $219 price estimate for Apple stock, which is about 3% below the current market price. However, Apple stock trades at a P/E of about 34x currently, based on FY’24 consensus earnings, which is slightly high in our view, given the company’s mixed growth rates in recent years. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.

While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/29/2024
[2] Cumulative total returns since the end of 2016

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