News

Caution on Apple: A Closer Look

James L. Flint

• October 04, 2023

Investors are exercising caution when it comes to technology stocks, and the recent surge in bond yields is a major factor contributing to the decline. However, what might come as a surprise is the bearish view on tech giant Apple.

Shares in Apple (AAPL) experienced a dip on Wednesday, following the broader weakness in the tech sector. The stock declined by 1% in premarket trading, underperforming both the S&P 500 and Nasdaq indexes. One contributing factor to this underperformance is the downgrade of Apple by analysts at KeyBanc Capital Markets. They lowered their rating from Over Weight to Sector Weight.

Led by Brandon Nispel, the analysts identified four reasons for exercising caution on Apple:

Valuation Concerns

Apple continues to trade at historically high multiples, with a price-to-earnings ratio of 26.3 times next year's earnings, compared to the historical average of 23.5 according to FactSet data. Additionally, Apple's valuation appears to be significantly higher than that of the tech-heavy Nasdaq index.

Challenging U.S. Sales

Based on their proprietary analysis of over 1.8 million KeyBanc cardholders in the U.S., the analysts believe that U.S. sales are likely to face challenges. They point to restrictive carrier iPhone promotions and upgrade rates as factors contributing to this view.

International Market Conditions

The international growth expectations for Apple may be overly optimistic, according to the analysts. They suggest that the market's outlook may be too aggressive.

Wall Street Estimates

The KeyBanc team also notes that estimates on Apple's financial performance, both in terms of revenue and profitability, appear to be quite optimistic.

While user growth remains crucial in their view, the analysts admit that near-term prospects may be lacking catalysts, which results in a neutral risk/reward profile.

It is important to consider this analysis from KeyBanc, especially as technology stocks face ongoing pressure. While some Apple shareholders may dismiss recent weakness as part of a broader trend, it is crucial not to overlook the deeper factors at play. Blaming the Federal Reserve and rising Treasury yields may offer a convenient explanation, but KeyBanc's analysis serves as a reminder to take a more holistic view.