Zhitong
2024.04.02 14:37
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Is it time to "buy the dip"? Analyst: Apple's darkest moment may have passed

Apple's stock price has fallen by more than 10%, with a market value evaporating by about $330 billion. Traders are looking for signs that the worst may be over. Compared to other large tech companies, Apple is undervalued. Microsoft has a market value close to $3.1 trillion, while Apple is at $2.7 trillion. The market believes that Nvidia is replacing Apple as the tech giant worth owning. Apple has shown no performance in artificial intelligence, faces regulatory threats, and is experiencing a slump in iPhone sales

According to Zhitong Finance, as Apple Inc. (AAPL.US) stock price has shown its worst quarterly performance in over a decade compared to the S&P 500 index, traders are looking for signs that the worst period may be over. Data shows that as the S&P 500 index rises, Apple's first-quarter return lags behind by 21 percentage points, marking its worst performance since 2013. However, the decline is approaching a key support level of nearly $165, which was the low point touched in October last year when the market also rebounded. The 12% drop in Apple's stock price since the beginning of the year has rewarded short sellers, giving them the impetus to close their positions. Technical analysts say the stock is hovering at a level where it may be a good buy opportunity. This lag compared to other large tech companies may make Apple appear cheap.

Without the AI tailwind, Apple's valuation suffers a defeat

Investors hoping to invest in the next large growth market have turned their attention to artificial intelligence. NVIDIA (NVDA.US) is replacing Apple as a tech giant worth owning, as the demand for chips used in large language models seems endless.

Apple's stock price has fallen by over 10% this year, evaporating about $330 billion in market value, and relinquishing the title of the world's most valuable company to Microsoft (MSFT.US). Microsoft is integrating ChatGPT into products like Office software, starting to boost its revenue growth. Microsoft's current market value is close to $3.1 trillion, while Apple's market value is $2.7 trillion. In the arms race of artificial intelligence computing power, NVIDIA, with significantly soaring revenue and profits, closely follows with a market value of $2.2 trillion.

The issue is not that Apple has suddenly stopped growing; this situation has been ongoing for some time—despite the stock price repeatedly hitting new highs, Apple's revenue for each quarter of the previous fiscal year has been declining. The problem is that at a time when iPhone sales are sluggish and the company faces increasing regulatory threats, the company has shown no performance in artificial intelligence. Mark Lehmann, CEO of Citizens JMP Securities, said, "We are experiencing an incredible wave of innovation. The market tells you that Apple has a lot to prove, but so far, they haven't proven much."It is well known that Apple is very secretive about its plans to incorporate artificial intelligence services into its products. Apple CEO Cook has promised that Apple will "break new ground" in the field of artificial intelligence this year, with market professionals expecting major news at Apple's annual software developer conference in a few months. However, many investors are losing patience and turning to stocks with a clearer path in artificial intelligence development.

The core of Apple's dilemma is the disappearance of revenue growth. The company's first significant new product category in nearly a decade, the Vision Pro headset, is not expected to make a significant contribution to growth in the coming years. Apple recently abandoned its long-standing efforts to manufacture electric cars. Meanwhile, due to economic weakness and increased competition, iPhone revenue has stagnated and sales in China have also declined.

According to data compiled by Bloomberg, sales for the 2023 fiscal year have declined by 3%, with only a 2% growth expected for this fiscal year. In contrast, the company saw a revenue increase of 33% in 2021. Meanwhile, sales for Nvidia and Microsoft are expected to grow by 79% and 15% respectively this fiscal year.

Targeted by Short Sellers

Since the beginning of this year, Apple's market value has evaporated by over $300 billion, relinquishing the position of the highest-valued company in the U.S. to Microsoft (MSFT.US). Reasons for the decline in Apple's stock price include declining sales in China, regulatory scrutiny of the Apple App Store, and increasing investor concerns about its growth prospects.

In recent trading days, Apple's stock price has dropped to below $170 at one point. Breaking below this level and maintaining it could signal a retreat to the October low of $165.67. It closed at $170.03 on Monday.

While peers such as Nvidia, Meta Platforms (META.US), and Amazon (AMZN.US) continue to see their stock prices rise, short sellers are flocking to Apple. Data analysis company S3 Partners' data shows that Apple is the second most profitable short position this year, with paper profits of $2.4 billion. This may give them some impetus to close out their positions, although the size of outstanding short positions has not changed significantly, it is lower than last year's levels

Without AI, is Apple a "value stock" like Coca-Cola?

For the past twenty years, no company has embodied the prospects of the stock market more than Apple. It has transformed from a niche computer manufacturer to the world's most valuable company, making its stock a cornerstone of global investment portfolios. However, in the blink of an eye, Apple's shine has started to fade. Artificial intelligence is now the story of the tech world, and Apple lags behind other tech giants in this area.

This dilemma leaves Apple investors in a bind. The company's revenue growth has stalled, and its stock performance lags behind the Nasdaq 100 index by about 16 percentage points, marking its worst start since 2013. While the company still generates massive revenue, whether it can continue to grow at the pace investors expect remains uncertain. Apple executives have stated that they have grand plans in artificial intelligence, with optimists hoping this will help revitalize Apple's growth. But so far, its prospects are hard to predict.

All of this leaves investors wondering, if Apple's artificial intelligence dreams don't materialize, what role does its stock play today?

Phil Blancato, CEO of Ladenburg Thalmann Asset Management and Chief Market Strategist at Osaic, said: "It's becoming more like a value stock, a bit like Coca-Cola. In the foreseeable future, everything you want will provide you with defensive assets and market returns until new catalysts emerge."

Apple's "Safe Haven Attributes": Strong Cash Flow, Attractive Dividends

Craig Johnson, Chief Market Technician at Piper Sandler & Co., said: "No one wants to sell their Apple position because of the dividends, massive stock buybacks, and no one wants to pay capital gains tax for it. I don't think the stock price will fall much further from its current levels. The bigger risk is that Apple's stock may hover between $165 and $200 until it decisively breaks above the long-term moving average."

As Apple's stock price struggles, traders are increasingly concerned that tech stocks may face pressure in the coming months—even with Nvidia leading the way. Apple's performance relative to the $260 billion Invesco QQQ ETF tracking the Nasdaq 100 index hit a new low. This seems to indicate that momentum differentiation between tech stocks and the broader market has formed, with growth stocks showing weakness beneath the surfaceDespite facing challenges in China, Apple's large-scale buyback plan means that, according to Nancy Tengler, CEO of Laffer Tengler Investments Inc., Apple's stock still has upside potential for long-term investment managers.

After Nvidia's stock price surged by over 80% in 2024, concerns have arisen about how long the artificial intelligence boom can last. However, Mark Newton, Technical Strategy Director at Fundstrat Global Advisors, believes that Apple should not drag down the S&P 500 index unless it breaks its multi-year uptrend since the 2020 low.

Piper's Johnson suggests that if other tech stocks underperform, it may even prompt investors to turn back to Apple. Johnson said, "If traders sell Nvidia, will they turn to buy Apple instead? I often hear this from clients. Investors like to swap one of the 'Magnificent Seven' stocks for another."

Apple remains a reliable money-making machine as always. It is undoubtedly a cash flow giant friendly to shareholders and a safe haven with a bulletproof balance sheet. Kevin Walkush, portfolio manager at Jensen Investment Management, said, "If you are a long-term investor who truly appreciates steady, stable growth, this is like a pension plan. Profit margins continue to grow, profitability keeps improving, the business generates a lot of cash, and there is still plenty of room for innovation. We believe Apple is a good choice."

Despite Apple's disappointing performance this year, it is easy to believe that Apple's stock price is poised for a rebound, and it is premature to exclude it from the artificial intelligence race. With over $170 billion in cash on its balance sheet and projected net profits exceeding $100 billion this year, Apple has unparalleled resources to enter new markets and return cash to shareholders through dividends and stock buybacks.

Walkush from Jensen Investment Management said, "It's hard not to compare it to the current hot companies. If you take away artificial intelligence and the flashy stuff now, would people view Apple differently? I think they would."