Apple: The Cart May Tumble (Rating Downgrade)

Summary:

A 32% run YTD and 13% run in a month and a half is too much too fast.
Fundamentals, technicals, and sentiment do not support buying here.
I am downgrading the stock to a Hold.

<figure class=”getty-figure” data-type=”getty-image”><picture> <img src=”https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w750″ alt=”Apple Store” data-id=”458990823″ data-type=”getty-image” width=”4952px” height=”3185px” srcset=”https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w1536 1536w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w1280 1280w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w1080 1080w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w750 750w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w640 640w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w480 480w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w320 320w, https://static.seekingalpha.com/cdn/s3/uploads/getty_images/458990823/image_458990823.jpg?io=getty-c-w240 240w” sizes=”(max-width: 768px) calc(100vw – 36px), (max-width: 1024px) calc(100vw – 132px), (max-width: 1200px) calc(66.6vw – 72px), 600px” loading=”lazy”> </picture><figcaption> Nikada/iStock Unreleased via Getty Images</figcaption></figure>I wrote <a href=”https://seekingalpha.com/article/4583952-apple-when-the-crowd-looks-one-way” title=”https://seekingalpha.com/article/4583952-apple-when-the-crowd-looks-one-way” target=”_blank”>this</a> article a month and a half earlier arguing Apple Inc. (NASDAQ:<a href=”https://seekingalpha.com/symbol/AAPL” title=”Apple Inc.”>AAPL</a>) was still a good contrarian buy despite a 20% YTD run at that time. Since then, the stock has gained an additional 13% as shown below compared to about 4% gain for the market average. <figure class=”regular-img-figure paywall-full-content invisible” contenteditable=”false”><picture> <img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816758708004222.png” alt=”Price Since” contenteditable=”true” loading=”lazy”> </picture><figcaption>Price Since (Seekingalpha.com)</figcaption></figure>While I will take any pat on the back for calling this right, I now believe the stock has gone up too much, too fast. A 13% gain on a nearly three trillion dollar company deserves a lot more scrutiny than a higher gain on most stocks due to the law of large numbers. When you factor in that this run was not backed by any significant fundamental good news from/about the company, this run appears even more flaky, fueled primarily by relief over inflation numbers and hopes about a dovish Federal Reserve. In fact, most of the recent news around Apple have been negatives around <a href=”https://seekingalpha.com/news/3955240-apple-slips-idc-says-mac-shipments-fell-year-over-year-pc-weakness” title=”https://seekingalpha.com/news/3955240-apple-slips-idc-says-mac-shipments-fell-year-over-year-pc-weakness” target=”_blank”>PC weakness</a> and Apple’s <a href=”https://seekingalpha.com/news/3956225-apple-glasses-mass-production-until-2026-or-2027″ title=”https://seekingalpha.com/news/3956225-apple-glasses-mass-production-until-2026-or-2027″ target=”_blank”>delayed foray</a> into consumer mixed reality. For consistency, I am presenting this article using some of the same metrics used in the previous article while adding a couple of different metrics. Let us get into the details. <h2 class=”paywall-full-content invisible no-summary-bullets”>Historical Valuation</h2> Apple is currently trading at approximately the same trailing and forward multiple of 28, which as shown below is more than 15% higher than the 5 year average of 24. Given an <a href=”https://finance.yahoo.com/quote/AAPL/analysis?p=AAPL” rel=”nofollow” title=”https://finance.yahoo.com/quote/AAPL/analysis?p=AAPL” target=”_blank”>expected earnings</a> growth rate of 8%/yr, Apple’s Price-Earnings/Growth (“PEG”) has pushed past 3.50. I wrote in the previous article that a PEG of 3 at that time was too rich for me and this has obviously gotten worse with the recent run up. As a comparison, Alphabet Inc’s. (<a href=”https://seekingalpha.com/symbol/GOOG” title=”Alphabet Inc.”>GOOG</a>) (<a href=”https://seekingalpha.com/symbol/GOOGL” title=”Alphabet Inc.”>GOOGL</a>) recent worries about its search dominance has pushed its PEG to a very attractive 1.30 based on forward multiple of 21 and <a href=”https://finance.yahoo.com/quote/goog/analysis?p=goog” rel=”nofollow” title=”https://finance.yahoo.com/quote/goog/analysis?p=goog” target=”_blank”>expected earnings</a> growth rate of 16%. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><a href=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816762836562498_origin.png” rel=”lightbox” data-width=”1164″ data-height=”369″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”><img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816762836562498.png” alt=”AAPL PE” contenteditable=”true” loading=”lazy”></a><figcaption>AAPL PE (YCharts.Com)</figcaption></figure><h2 class=”paywall-full-content invisible no-summary-bullets”>Higher Expectations</h2> With Apple expected to report earnings in about two weeks, it is important to keep an eye on sentiment and expectations. While the numbers below (7 EPS up revisions and 4 Revenue up revisions) still show a heavy tilt towards downward revisions, they are still up from the numbers at the time of my March review. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><a href=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816763397136238_origin.png” rel=”lightbox” data-width=”1246″ data-height=”203″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”><img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816763397136238.png” alt=”AAPL Revisions” contenteditable=”true” loading=”lazy”></a><figcaption>AAPL Revisions (SeekingAlpha.com)</figcaption></figure>In addition, the sentiment on Seeking Alpha seems to have turned heavily to the bullish side comparatively since my last article. The last 10 Apple articles on Seeking Alpha have the following ratings: <ul class=”paywall-full-content invisible no-summary-bullets”> <li>Strong Buy: 1</li> <li>Buy: 3</li> <li>Holds: 3</li> <li>Sell: 3</li> </ul> <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><picture> <img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816764093342485.png” alt=”AAPL Coverage on SA” contenteditable=”true” loading=”lazy”> </picture><figcaption>AAPL Coverage on SA (Seekingalpha.com)</figcaption></figure>As a comparison, the ratings at the time of the March article were as follows: <ul class=”paywall-full-content invisible no-summary-bullets”> <li>Holds: 5</li> <li>Sell: 3</li> <li>Strong Sell: 2</li> </ul> When the crowd looked one way (bearish), I was bullish and the stock rewarded by outperforming the market by three times. It now appears the crowd is getting more bullish and the contrarian in me says otherwise. <h2 class=”paywall-full-content invisible no-summary-bullets”>Cash As a Percentage of Market Cap</h2> The recent run up combined with Apple’s reducing cash pile has resulted in cash being less than 2% of the company’s market cap. Long term Apple investors may recall that this is a far cry from numbers <a href=”https://www.dividend.com/how-to-invest/10-charts-to-put-apples-cash-and-earnings-in-perspective/” rel=”nofollow” title=”https://www.dividend.com/how-to-invest/10-charts-to-put-apples-cash-and-earnings-in-perspective/” target=”_blank”>as high as</a> 30%. Apple is a cash flow machine and there is not an iota of doubt in my mind about the company’s ability to pay its debt and shareholder dividends but the fact that cash is such a small percentage of the company’s total worth makes stock valuation all the more important. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><a href=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816775703173199_origin.png” rel=”lightbox” data-width=”1225″ data-height=”468″ data-og-image-twitter_small_card=”true” data-og-image-twitter_large_card=”true” data-og-image-twitter_image_post=”true” data-og-image-msn=”true” data-og-image-facebook=”true” data-og-image-google_news=”true” data-og-image-google_plus=”true” data-og-image-linkdin=”true”><img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816775703173199.png” alt=”AAPL Cash on Hand” contenteditable=”true” loading=”lazy”></a><figcaption>AAPL Cash on Hand (YCharts.com)</figcaption></figure><h2 class=”paywall-full-content invisible no-summary-bullets”>Historically Low Yield</h2> As I stated in the previous article, Apple’s dividend is not that big of an attraction despite almost 10 years of dividend increases. This is primarily due to the stock’s price appreciation and Apple’s cautious (some may call stingy) nature. But for those who look at dividends as a margin of safety, Apple’s yield is almost at a historic low with the current yield of 0.56% well short of even the lowly 5 year average of 0.90%. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><a href=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816878810877483_origin.png” rel=”lightbox” data-width=”1192″ data-height=”370″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”><img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816878810877483.png” alt=”Apple Yield” contenteditable=”true” loading=”lazy”></a><figcaption>Apple Yield (YCharts.com)</figcaption></figure><h2 class=”paywall-full-content invisible no-summary-bullets”>Technicals</h2> While Apple’s <a href=”https://www.barchart.com/stocks/quotes/AAPL/technical-analysis” rel=”nofollow” title=”https://www.barchart.com/stocks/quotes/AAPL/technical-analysis” target=”_blank”>moving averages</a> are still sound, the run up in price has pushed the stock’s Relative Strength Index (“RSI”) from 35 to almost 63 as shown below. This is still below the textbook overbought level of 70 and it won’t be a surprise to see a new 52-week high on this momentum. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><picture> <img src=”https://static.seekingalpha.com/uploads/2023/4/16/1003408-16816765671805778.png” alt=”AAPL RSI” contenteditable=”true” loading=”lazy”> </picture><figcaption>AAPL RSI (Stockrsi.com)</figcaption></figure>While that sounds positive, Apple is historically not known for being overvalued for too long. For a very long time, the stock was undervalued and believers had to pound the table for the stock to be respected in the early days of the Tim Cook era. In the last 5 years, Apple’s RSI never breached 75 according to the chart below and with the current reading of ~63, I am inclined to believe a cooling period is around the corner sooner than later. <figure class=”regular-img-figure paywall-full-content invisible no-summary-bullets” contenteditable=”false”><a href=”https://static.seekingalpha.com/uploads/2023/4/17/1003408-1681734144713872_origin.png” rel=”lightbox” data-width=”1357″ data-height=”309″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”><img src=”https://static.seekingalpha.com/uploads/2023/4/17/1003408-1681734144713872.png” alt=”AAPL RSI” contenteditable=”true” loading=”lazy”></a><figcaption>AAPL RSI (aiolux.com)</figcaption></figure><h2 class=”paywall-full-content invisible no-summary-bullets”>Conclusion</h2> <div class=”before_last_paragraph-piano-placeholder paywall-full-content invisible no-summary-bullets”></div> I still believe in the future of Apple and its products and services. I still believe the opportunity cost of selling a stock like this and chasing it later is too high/risky for most investors. But that does not mean the stock is a buy always. Apple is priced for perfection and beyond at this point. Any hint of macro or company specific weakness is enough to topple the Apple cart (Ha!). In short, I am downgrading Apple from “Buy” to “Hold”. I suggest not initiating a position here.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, GOOG either through stock ownership, options, or other derivatives. 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. Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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