Apple Isn’t Priced for a Recession

Apple CEO Tim Cook at an iPhone presentation last year.



Photo:

apple inc handout/Shutterstock

The “new”

Apple

AAPL -0.38%

isn’t really new. But it is new enough that the 46-year-old company’s modern incarnation has yet to see its resilience truly tested by a global recession.

Investors currently aren’t baking one in. Apple’s share price has indeed taken a hard hit over the past few months, along with the rest of the tech sector. But it has still outperformed the Nasdaq and most of its tech peers this year, and is one of the few among them in positive territory for the past 12 months.

Apple’s shares are currently valued at 21 times forward earnings, a 38% premium to the S&P 500. That is 29 percentage points above Apple’s five-year average premium to the index—a wider gap relative to history than any of its trillion-dollar tech peers,

Microsoft,

Amazon

and Google-parent

Alphabet.

This premium reflects a steadfast belief that gadget buyers won’t be hanging up on the iPhone—still Apple’s most dominant product—or the company’s other devices in the event of a sharp global economic downturn that a growing number of experts and chief executives are projecting. The company has indeed managed through recessions in the past, though the past two happened to coincide with product launches that ultimately remade the company once focused on niche computers. Apple launched its first iPod digital music player in late 2001 in the midst of the recession sparked by the first dot-com bust, while the first iPhone launched in 2007 right before the global financial crisis ushered in the last major recession.

The iPhone in particular was well timed, as it helped Apple revolutionize a mobile-device market dominated by flip phones and BlackBerrys. Apple’s revenue soared 50% during calendar year 2008, the iPhone’s first full year of sales, even as U.S. GDP contracted by 2%. The iPhone also recast Apple’s profitability, adding more than 10 percentage points to the company’s annual gross margin compared with what it had been averaging in the years before jumping into the smartphone business.

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But the iPhone is now a much larger and more mature business. And it was already coming off a strong sales cycle sparked mostly by carrier incentives for 5G upgrades. While Apple’s revenue base is now 15 times larger and includes a growing services arm, hardware still accounts for more than 80% of the company’s total revenue. Even the services side has a large transactional component from categories such as App Store downloads.

Toni Sacconaghi

of Bernstein estimates that less than 10% of Apple’s revenue is recurring—the least among big tech hardware makers.

As markets react to inflation and high interest rates, technology stocks are having their worst start to a year on record. WSJ’s Hardika Singh explains why the sector — from tech giants to small startups — is getting hit so hard. Illustration: Jacob Reynolds

As a result, Apple may not be as immune to a sharp global downturn as many seem to think. Analysts currently expect Apple’s revenue to be flat year over year in the June-ending quarter, mostly as a result of the restrictive Covid lockdowns in China that affected both production and demand for the company’s devices. But that is expected to be short-lived; Wall Street projects Apple will return to growth in the rest of this calendar year and next.

Morgan Stanley,

however, warned last week that 55% of high-income respondents in its most recent consumer survey expect to cut back spending on electronics in the next six months because of inflation. The broker warned that Wall Street’s estimates for Apple “still need to come down” even as it retains a buy rating on the stock. Unless, of course, Apple finally has that car ready to roll.

Write to Dan Gallagher at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the June 23, 2022, print edition.

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