Bull Vs Bear Case for Apple
Apple (AAPL) has created an unparalleled ecosystem, consistently reports strong financials, and has ultra-loyal customers — collectively resulting in a wide moat. Considering shares are down around 25% year to date, it may be a tempting buy, but could the tech giant’s stock dip even further? According to the bear case, it could, and based on several variables, it’s likely.
First, the Bull Case
There is no denying the value of Apple Inc. The brand is one of the world’s most affluent tech companies, rich in history and full of innovation. Its products are recognized and loved by millions. The company has sold over 1.3 billion iPhones since its launch, contributing to a market value of over $2 trillion.
Its product line includes everything from the MacBook to its Wearables category, which brought in $38.4 billion in 2021 alone, yielding a 31.6% compound annual growth rate (CAGR). Its subscription-based Services category also shines with FY2021 revenue of $68.4 billion, resulting in a 20.3% CAGR.
In recent years, Apple’s products have become a virtual necessity in life. The company has excellent financials and a massive investor base, including Berkshire Hathaway (BRK.A) (BRK.B).
While nothing is certain, most would bet that Apple has a bright future. For long-term investors, it’s an attractive buy. If growth continues as it has, the current share price could be a steal.
Despite all that, growth is slowing, and the current macroeconomic conditions are becoming a greater concern.
Now, the Bear Case
As discussed above, as long as recent growth continues, Apple stock remains an attractive buy — but that’s a big IF at the moment. Looking at past years, several figures showcase slower growth.
These values show that even a company with as wide a moat as Apple enjoys, it can still lose momentum. However, during these slow-growth years, the company’s revenue relied more on the iPhone. In contrast, today, the company’s Services revenue is a more significant portion of total revenue — a more stable category than cyclical smartphone sales.
Despite the company’s diversity, it’s safe to assume the bear case is looming. If growth slows and fair value drops, share prices may be significantly overvalued at today’s price.
An apparent reason the company’s sales and free cash flow may suffer is a weaker economy. As we head into 2023, consumer credit card debt is high, and savings are low. Many will opt to hang onto their old iPhone model, which means fewer upgrades and declining Apple sales.
However, there are also some other red flags to keep in mind. For example, Apple is moving manufacturing from China to India. This scenario has long-term positives, including diversifying manufacturing away from China following the recent workers’ revolt. However, this transition will take a long time and create unique challenges. Another concern is possible delays in launching Apple Car. The company recently scaled back its ambition, delaying the self-driving car’s debut to 2026.
Read more: Best Strategy for a Bear Market
Prepare for the Bear Case
As you prepare your portfolio for today, next year, and the coming decade, know that the bear case is more than possible, it’s probably near-term.
First of all, growth is likely to slow down based on the sheer size of Apple. As companies grow bigger and their products mature, ongoing growth often decelerates. Looking at Apple’s massive FY2021 total revenue of $365.8 billion, it is improbable based on the law of large numbers that the company could sustain double-digit growth.
This, combined with still high inflation rates, continued interest-rate hikes, and weaker consumer demand, mean that shares could dip further, and when they do, the current price will no longer seem like the bargain it once was.