Apple: Beijing Sends A Message

Summary:

• Beijing’s efforts to stimulate the economy and improve ties with Western governments could help Apple Inc. improve its performance in the short term.
• Apple’s strategy of launching new products and services, such as the iPhone 15 series and Vision Pro headset, could also lead to higher sales in the following quarters.
• However, despite all of the positive developments, geopolitical risks will likely continue to haunt Apple for years to come.

As international capital is leaving China, Beijing is aiming to prevent a spike in outflows by stimulating the economy to attract investors and trying to improve ties with Western governments to minimize geopolitical risks for everyone. It’s too soon to tell whether those efforts will be successful, but what’s certain is that they at the very least should try and help Apple Inc. (NASDAQ:AAPL) improve its performance in the short term.

Let’s not forget that the company experienced four consecutive quarters of Y/Y revenue declines in part due to the weakness of the Chinese market on which Apple is significantly relying these days. At the same time, as companies are moving their production to other countries, Apple is too entrenched in China to quickly move elsewhere without paying an excessive price. Therefore, any positive moves by Beijing are a breath of fresh air for Apple, since the company could easily become one of the biggest casualties of the potential Sino-American confrontation in the future if the tensions are not eased.

There’s Hope On The Horizon

After Apple reported its fiscal Q4 earnings results earlier this month, there was a mixed reaction from investors. Even though the company generated $89.49 billion in revenues, which was in-line with the estimates, the sales were still down -0.7% Y/Y. This was the fourth consecutive quarter of a Y/Y sales decline, which made a lot of investors question whether it makes sense to hold Apple’s shares given the weak performance in the last year. While this debate is still ongoing, there are reasons to believe that the worst for the company is behind it as there are several growth catalysts that could improve the situation in the foreseeable future and already have helped Apple’s shares to rally in recent weeks.

Back in August, I wrote an article on Apple in which I highlighted the company’s latest strategy of relying on the launches of new products and services to revive growth. We’re already seeing this strategy in action as the sales of Apple’s iPhone division were up 2.7% Y/Y in Q4 to $43.8 billion, primarily thanks to the launch of the company’s iPhone 15 series in late September.

We’re likely going to see a similar thing happening with Apple’s Mac and iPad divisions next year when the company launches new laptops and tablets. The latest news suggests that new MacBooks are expected to be launched in early 2024 and revive the growth of the Mac business, which generated only $7.61 billion in Q4, down 33.9% Y/Y.

At the same time, even though the revenues of Apple’s wearables, home, and accessories division were down 3.4% Y/Y to $9.32 billion in Q4, there’s an indication the situation will drastically improve in early 2024 as well with the launch of the company’s newest headset Vision Pro. Back in June, I wrote an article about Apple’s newest device and highlighted how the company’s unique strategy of entering the AR/VR market could yield significant results despite the high price tag of Vision Pro and improve overall sales.

What’s more is that while Apple is working on improving its hardware business, it continues to generate record revenues for its software business, which has already overtaken the Mac and iPad divisions by size. In Q4, Apple’s services revenues increased by 16.3% Y/Y to $22.31 billion primarily thanks to the company’s ability to collect significant fees from purchases that are made within the company’s closed ecosystem. The potential entrance into the generative AI field could lead to the expansion of those and other revenues in the future as well.

Another thing that Apple has going for it is the improved macro environment that should also help it mitigate the poor performance in recent quarters. Even though the company’s sales in China declined in Q4, the latest data shows that the consumer sentiment there has improved as the growth in the recent quarter has exceeded expectations. What’s more, is that there are reasons to believe that the latest stimulus program approved by Beijing could help the economy reach the official targeted growth rate for the year and improve Apple’s performance in China at the same time. Add to all of this the latest Sino-American Summit in San Francisco in which China and the United States agreed to strive for a peaceful co-existence and it becomes obvious that the macro situation for Apple is likely to improve in the short term at the very least.

All of those developments certainly should make it possible for Apple to at least improve its performance in the coming months after four quarters of revenue declines. The latest Street forecasts suggest that revenues are probably going to increase in FY24 and beyond, which indicates that the worst for Apple is likely behind it and the latest appreciation of the company’s shares makes sense despite the mixed performance in fiscal Q4.

What’s also important to note is that the company currently trades at a forward P/E of ~29x. While this is above the S&P 500 (SP500) average P/E ratio of ~25x, it makes sense for a company like Apple to trade at a slight premium in comparison to others given its size and influence. Add to this the fact that the consensus on the Street is that Apple’s shares still represent an upside at the current price, and we could conclude that its shares have room for growth if the momentum remains on the company’s side.

The Only Risk That Truly Matters

While in the short term Apple is likely to be alright and there are reasons to believe that in FY24 the management would be able to revive growth, it’s still safe to say that geopolitical risks will continue to haunt the company for years to come. Considering that the Chinese market accounts for over 25% of total sales for Apple, the company is constantly exposed to macro risks that are outside of its control and could disrupt its business at any moment. Even though consumer sentiment is improving in China, the company continues to lose international investors as Beijing increases its presence in the private sector.

In Q3, China experienced the first outflow of foreign direct investments in decades, and there’s an indication that big American funds are leaving the country to mitigate geopolitical risks, as the trade war between the U.S. and China is still not over yet. Add to all of this the fact that the DoD in its latest report once again stated that China is the only competitor with the intent, will, and capability to reshape the international order and it becomes obvious that geopolitical risks won’t go anywhere away.

What’s more is that as international capital leaves China, the country itself tries to become more self-reliant in different industries that are or have been previously dominated by foreigners. After the Chinese phone maker Huawei lost significance a few years ago after it was barred from using the Android operating system, it recently made a comeback by presenting its new flagship phone that potentially includes a 5G-capable chip. Jeffries believes that the iPhone could lose the competition to the Huawei phone in China next year, as the initial sales of iPhone 15 there so far have disappointed some. As such, Apple still risks becoming one of the biggest casualties of the ongoing Sino-American trade war as both sides decrease their exposure to one another.

The Bottom Line

Given all the latest developments, I decided to stick with my HOLD rating for Apple. This is due to the fact that even though Beijing’s efforts to improve its economy and minimize geopolitical risks should be viewed as a positive development for Apple, there’s no guarantee that those efforts would be successful in the long run. At the same time, China has become too big from the supply and demand side for Apple to be ignored in the first place. As such, the potential rise of macro risks is likely going to make it harder for the market to justify the company’s premium valuation over time. However, new product launches along with the potential improvement of the Chinese economy in the next couple of months could nevertheless help the stock retain its momentum for a while.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Bohdan Kucheriavyi and/or BlackSquare Capital is/are not a financial/investment advisor, broker, or dealer. He's/It's/They're solely sharing personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.

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