- Apple (AAPL) today is a value stock, a defensive play.
- Apple revenue is still driven by product sales, not cloud services.
- As Apple goes, so goes the market.
It’s the ultimate market bellwether.
A quick look at a stock chart shows this clearly. Since the start of 2022 Apple has risen when the market has risen, fallen when it has fallen. On the year, shares are down 9.6%. The S&P 500 is down 11%.
This is not necessarily good news for Apple shareholders like me. For a decade Apple has been a clear way to beat the market, a superior growth stock. Over the last 5 years it has averaged a 69% rise each year. It has also delivered consistent and rising dividends, although they currently yield just .54%.
Now, it’s a value stock.
Why AAPL Stock Fell
AAPL stock fell for the same reason the whole market did.
Inflation and rising interest rates have compressed earnings multiples. They are expected to compress margins. When you could get a mortgage for 2%, it made sense to buy stocks trading at 25 or 30 times earnings. Today, with mortgages costing 5%, the median S&P stock trades at just 15 times earnings, in line with historic averages.
Since Apple has proven a superior investment over time, it deserves a superior multiple. It opened for trade April 28 selling at 26 times earnings. The stock’s price was $160, a market cap of $2.55 trillion. No company had been worth more than $1 trillion before Apple. Only Saudi Aramco is worth more today.
Apple is trading higher today because analysts expect it to beat earnings estimates. The consensus estimate is for $1.43/share of earnings on revenue of $94 billion. But the “whisper number,” the open secret analysts may say to another in hushed voices, is for earnings of $1.57/share.
If Apple beats the whisper number, expect the whole market to rise. If it fails to even beat the consensus estimate, the whole market will fall.
What’s Apple Today?
I count Apple among the “Cloud Czars.” It’s one of five companies that invested heavily in networks of cloud data centers, paying for them with cash. These companies — Apple, Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG, GOOGL), Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:FB) — now dominate the world economy.
But the Czars are very different. The value of Apple stock is still driven more by its device sales than its service revenue. In its December quarter, just 16% of Apple’s $124 billion in revenue came from services.
Analysts remain attached to Apple’s cloud services revenue because it’s enormously profitable. Last quarter, Apple spent just $5.4 billion to draw $19.5 billion in service revenue. It spent $64.3 billion on products that brought in $104.4 billion.
But Apple results are still based on sales of iPhones, iMacs and other gear. They’re still highly seasonal. Revenue for the Christmas quarter can be 30-40% higher than in other quarters. That’s not the case with Microsoft, which is driven by its Azure cloud. Last year Microsoft’s June quarter saw more revenue than the previous December.
The Bottom Line on AAPL Stock
So long as inflation remains elevated and interest rates rise, Apple stock will provide little shelter from the storm.
A diversified portfolio, however, needs to have some Apple in it, for when market conditions improve.
I believe those conditions will improve because of technology’s deflationary effect. Entire professions have been replaced by cloud services in the last decade. Many more will be in the current one. This saves money for both consumers and businesses. It lets workers focus on higher-value tasks. If finds solutions to once intractable problems in supply chains and in retail channels. It creates new value where none existed and makes commerce available everywhere.
Apple and clouds are why America’s economy today dominates the world.
On the date of publication, Dana Blankenhorn held long positions in MSFT, AAPL, GOOGL and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.