Apple Stock Deep Dive: AAPL price target at $100 on falling 2023 revenues

Apple’s (AAPL) last quarterly earnings report on April 28 was solid, with earnings and revenue both beating consensus analyst forecasts. However, Apple management was downbeat on the conference call, highlighting growing problems related to supply chain issues and inflationary headwinds. We believe the pandemic and associated monetary stimulus have resulted in a generational pulling forward of demand, leading to a risk of a 2023 onwards multi-year low in iPhone demand.

Also read: Tesla Stock Deep Dive: Price target at $400 on China headwinds, margin compression, lower deliveries

New iPhone models will not have the same 5G kicker that the iPhone 13 benefited from and are likely to have noticeably higher sticker prices. 78% of Apple iPhone users are under the age of 35, exactly the cohort who will see disposable incomes hurt most by inflation. This age cohort has fewer savings to fall back on and less of an asset base to cushion any inflationary pressure. The caveat is that this age group spends a much larger portion of its income on discretionary purchases in good economic environments due to a lower level of rent and mortgage payments. 

For now, incomes remain strong in the face of rising inflation and a tight labor market, but economies are reaching the peak of this cycle in our view. With stock markets being forward-looking, we are taking a downbeat view of 2023 earnings and so a reduced price target versus our peers. We also take note of recent weakness in the Chinese smartphone market with data on May 16 showing shipments down 40.5% annually. China represents 20% of Apple’s revenue, but operating margins from China are significantly higher than in other regions for Apple. 

We expect 2022 to remain on track for forecasts, but model 2023 with revenues falling 10% and margin compression due to rising input costs and inflationary pressures continuing. For 2024, we see revenues and margins both flat. 

This leads us to a price target of $100 based on traditional P/E, EV/EBITDA and intrinsic valuation methods which we go through in detail below. 

Apple overview

Apple manufacturers and designs consumer technology products. The most noteworthy are the iPhone and iPad. The company also manufactures its smartwatch, the Apple Watch, and operates on a global basis. Apple was founded in 1977 in California by Steve Jobs, Ronald Wayne and Steve Wozniak. Apple initially focused on the PC market before launching and revolutionizing the personal music market with the introduction of the iPod in 2001. This essentially launched the music streaming market, and Apple iTunes was the largest music store in the world but finally succumbed to the rise of streaming in 2019. Apple stock trades under the ticker AAPL. 

Apple geographical segmentation

Annual Business Line by Segment in Millions of U.S. Dollars
		2021	2020	2019	2018	2017
	Period End Date	25-Sep-2021	26-Sep-2020	28-Sep-2019	29-Sep-2018	30-Sep-2017
Americas		42%	45%	45%	42%	42%
Operating Margin (%)		34.82%	30.29%	30.02%	31.10%	31.76%
Europe		24%	25%	23%	24%	24%
Operating Margin (%)		36.40%	32.30%	31.84%	31.97%	30.06%
Greater China		19%	15%	17%	20%	20%
Operating Margin (%)		41.69%	37.86%	37.16%	38.01%	38.05%
Japan		7.8%	7.8%	8.3%	8.2%	7.7%
Operating Margin (%)		44.93%	43.32%	43.56%	43.71%	45.66%
Rest of Asia Pacific		7.2%	7.1%	6.8%	6.6%	6.6%
Operating Margin (%)		37.25%	34.75%	34.04%	35.51%	34.90%

Source: Refinitiv and FXStreet calculations

We can see clearly how Asia and China provide the highest margin return for Apple, a fact we have already highlighted concerns over. Below we can see just how dominant the iPhone is to revenue generation, representing over 50% of revenue currently. Apple has chosen in the past to prioritize chips for iPhone production to the detriment of iPad production. 

Apple revenue by product

			HISTORICAL (ACTUALS)		FORECAST (MEAN)
	FY Sep-19	FY Sep-20	FY Sep-21	%	FY Sep-22	FY Sep-23	FY Sep-24
INCOME STATEMENT
REVENUE	260,174	274,515	365,817		394,010	416,241	436,301
IPAD	21,280	23,724	31,862	7.45%	29,415	30,124	32,126
IPHONE	142,381	137,781	191,973	51.42%	203,000	211,138	242,106
MAC	25,740	28,622	35,190	10.09%	39,838	39,516	44,679
OTHER PRODUCTS	24,482	30,620	38,367	10.74%	42,421	47,341	59,401
SERVICES	46,291	53,768	68,425	20.30%	80,134	90,785	140,529

Source: Refinitiv and FXStreet calculations

Apple consensus forecast

Of course, this is a well-followed company with a strong rating from the Wall Street community. Price targets have been following the market lower in a reactionary move. 

	Analysts Per level
	28-Feb-2022	30-Mar-2022	30-Apr-2022	Current
1 - StrongBuy	16	16	15	15
2 - Buy	23	23	24	24
3 - Hold	7	7	8	8
4 - Sell	-	-	-	-
5 - StrongSell	-	-	-	-
Rec Mean	1.8	1.8	1.9	1.9
Price Target Summary
Price Target	Target
	28-Feb-2022	28-Mar-2022	28-Apr-2022	Current
Median	$197.00	$199.50	$195.00	$190.00
Mean	$192.96	$193.53	$192.35	$188.92

Source: Refinitiv and FXStreet calculations

Apple key info and metrics

Market Cap		2.4 trillion
Enterprise Value (EV)		2.9 trillion
EV/EBITDA		19
Free Float		16.17 billion shares
IPO date		12-Dec-80
52 week high		182.94
52 week low		123.13
Short interest		0.70%

Source: Refinitiv, TradingView and FXStreet calculations

Apple peer valuation comparison

Once the most valuable company in the world, AAPL justifies itself with some high margins and an impressive return on equity. However, EPS growth rates have been slowing. Apple's price/earnings ratio (P/E) has come down from over 30 in late 2021 and currently is close to the average for the S&P 500 and Nasdaq. Apple's 20-year average P/E ratio is 22, so it has also retraced close to that level. 

	Market Cap	Gross margin	FCF	P/E	EV/EBITDA	P/book	P/Sales	EPS growth rate	ROE
Apple	$2.4 trillion	43%	$106 billion	23	19	37	7	-9%	149%
Google	$1.5 trillion	57%	$69 billion	19	14	5	6	-2%	31%
Qualcomm	$156 billion	59%	$7 billion	14	11	15	5	50%	107%
Motorola	$37 billion	46%	$1 billion	30	20		5	-9%
Nokia	$29 billion	39%	$1.5 billion	16	6	1.5	1	-3%	10%
Samsung	$362 billion	40%	$13 billion	10	4	1.5	1.5	24%	15%
S&P 500				20
Nasdaq				25

Source: Refinitiv, TradingView and FXStreet calculations

Macroeconomic analysis, market cycle and sector background

As we outlined in our Tesla deep dive article (see here), the macroeconomic backdrop continues to deteriorate. The combination of tighter monetary policy from global central banks, rising inflation and higher bond yields has sent risk assets into a bear market in 2022. Geopolitical headwinds from the Russia-Ukraine war have also meant supply chains remain in a state of flux and commodity prices remain at elevated levels. All of these elements will continue to eat into the margins and earnings of all companies. 

Apple 2022 % return versus Nasdaq and S&P 500

The Nasdaq and most tech stocks have entered an official bear market, defined as a loss of 20% or more. The S&P 500 has been holding just about above that decline for now. Bear markets on average have losses of nearly 40% from peak valuations and an average time span of 300 days. This bear market should have more time to run then – another 20% approximately if it is to meet the historical average. The key question is whether or not the US economy will go into recession in 2023. Bear markets without accompanying recessions are notably less severe with average peak-to-trough declines of 25%. This is a key metric to understand.

Deutsche Bank was the first major investment bank to predict a US recession by 2023, and there are numerous other indicators showing the likelihood of a recession. The yield curve is a favorite tool, and it does have an accurate prediction quality. Shown below is the yield curve and the associated US recessions in grey following a move into negative territory for the curve. 

Also worth pointing out is the level of consumer confidence. The revised benchmark University of Michigan Confidence Indicator on May 27 showed consumer confidence at a low not seen since the Great Financial Crisis. Also of interest is the fact that sentiment levels this low are always associated with a US recession. Again the shaded areas in the chart below are US recessions.

A word on neon

Yet more problems exist on the supply chain front and even one that the market may not have fully come to grips with. Ukraine supplies about half the world's supply of neon gas. Neon is critical to the production of semiconductor chips. Apple needs those chips as does every other major technology manufacturer. See Reuters.

It is likely that major manufacturers such as those supplying Apple will have sufficient inventory built up for the remainder of this year, but 2023 may be a different story. This will be a serious headwind if it goes unresolved.

Apple news and earnings

Apple earnings for the quarter ended March 2022 showed continued strength with revenues up 9% and net income up 6%. iPhone sales were up 6%, but iPad sales fell 2% due to supply chain issues. This is a warning sign for us as Apple had telegraphed earlier in the year that it would prioritize chips for iPhone usage over the iPad. 

As mentioned above, Chinese shipments of smartphones fell 40.5% in March and in its last quarter earnings Apple’s China sales dropped 3%. 

Apple valuation analysis and fair value

We run standard DCF analysis using both a value in perpetuity approach and EV/EBITDA multiples. Current forecasts give us a fair value of $112 or $120 using unlevered free cash flows. If we use average analyst forecasts, then we get a much higher estimate of fair value at $184 using the growth in perpetuity model or $127 using EV/EBITDA.

	Apple free cash flows
	2019	2020	2021	2022 est	2023 est	2024 est	terminal
EBITDA	76,477	77,344	120,233	131,277	134,950	140,046
EBIT	63,930	66,288	108,949	119,475	123,548	128,145
Tax rate	15.944%	14.428%	13.302%	16.029%	15.960%	15.214%
EBIT (1-t)	64,284	66,185	104,239	110,236	113,412	118,739	0
D&A	12,547	11,056	11,284	11,397	13,038	15,129
Change in NWC	-	18,780	28,966	-37,574	-12,365	17,993	0
Capital expenditures	10,495	7,309	11,085	10,801	12,102	12,843
Unlevered free cash flows (UFCF)	41,242	29,040	52,904	125,612	100,636	72,774
Free cash flow forecasts	58,896	73,365	92,953	109,240	112,699	121,909
Discount rate (r)		10%	10%	10%	10%	10%	10%
PV of UFCFs		26,136	47,614	113,051	90,572	65,497	-
PV of FCF		66,029	83,658	98,316	101,429	109,718
Stage 1: Sum of present values		342,869
Sum of PV using FCF		459,150
Growth in perpuatiy valuation			Using Forecast FCF
growth rate		7%		7%
2024 UFCF		77,868		130,442
termival value in 2024		2,595,605		4,348,083
Present Value of Terminal Value		1,611,667		2,699,817
Enterprise value		1,954,536		3,158,967
current net debt		62928		62928
shares outstanding		16864.919		16864.919
equity value		$112		$184
EBITDA Multiple approach
ebitda multiple		20		20
terminal value in 2024		2,800,924		2,800,924
PV of term value		1,739,153		1,739,153
ent value		2,082,023		2,198,303
net debt		62,928		62,928
shares outstanding		16,865		16,865
equity value		$120		$127

Source: Refinitiv and FXStreet calculations

However, we then adjust for our lowered revenue and margin forecasts. We are estimating Apple revenues fall by approximately 10% in 2023 and then remain flat for 2024. This as mentioned is due to a global recession and global central bank stimulus that has essentially pulled forward multiple years of demand into the pandemic period. We are already seeing this unwind across multiple demand profiles in various industries. We expect demand to remain healthy for 2022, but inflation will then see it subside with the aforementioned lack of monetary stimulus also not helping. 

Margin compression is a feature of nearly every earnings call this quarter, and we do not expect that to subside. Costs are increasing globally across energy, semiconductors shortages, shipping costs and labor costs. Increased border controls mean globalization, as we know it, is coming to an end, resulting in greater add-on costs for globalized businesses. We forecast a modest reduction in margins back to 2021 levels. We believe this is likely understating the effects, but for now, we will run with a conservative margin compression to 38%. 

This gives us fresh forecasts as follows:

	2022	2023	2024
Revenue	394,134	365,000	365,000
Revenue	394,134	365,000	365,000
COGS	223,825	226,300	226,300
Gross Profit	170,309	138,700	138,700
Gross Margin	43.2%	38.0%	38.0%
SG&A (& Other)	28,575	30,659	34,081
R&D	21,914	21,914	21,914
Operating Profit EBIT	119,820	86,127	82,705
Operating Margin	30.4%	23.6%	22.7%
Other Income/(Expense)	120	861	3,608
Pretax Profit	119,940	86,987	86,313
Pretax Margin	30.4%	23.8%	23.6%
Inc Taxes (& Adjustments)	19,750	14,345	15,240
Tax Rate	16.5%	16.5%	17.7%
Net Income	100,190	72,642	71,073
Net Margin	25.4%	19.9%	19.5%
Shares (in millions)	16,274	15,797	15,620
GAAP EPS
Exclusions
Pro Forma EPS	6.16	4.60	4.55
Mean Estimate	6.14	6.56	6.91

Source: Refinitiv and FXStreet calculations

Running the new numbers into our DCF model above gives us a fair value of $110 using the perpetuity model with Apple’s 5-year average growth rate of 8%. It comes in at $96 using EV/EBITDA. These numbers may sound alarming to some, but this merely returns Apple to where it was trading in 2020. 

We can see from the chart below that Apple’s average price/earnings ratio over the past 20 years has been 22.08, so this is quite close to where it is now. Taking our EPS estimate above at $4.60 for 2023 gives us a price target of $101.56.

Clearly, using our reduced revenue and margin forecasts gives us a fair value range of $96 to $110.

For ease of use and the psychological preponderance of the market to fixate on round numbers, we place a $100 price target on Apple and a SELL rating.

Apple technical analysis

How does this $100 level fit in with the AAPL stock chart? This $100 level acted as resistance several times in July 2020 before strong earnings on July 30, 2020, supercharged Apple higher and it finally broke above. The current situation has Apple rallying to near $150, but strong support exists at $138.31. A likely break of $138.31 will see a slow move lower. Apple then would find itself in a well-trafficked zone from $130 to $115 with huge volume at those price ranges. Once below $115, volume thins out, meaning a test of $100 becomes more likely. A break of $100 looks likely from a technical perspective as surprisingly volume at $100 is light, meaning low price acceptance. This would be consistent with stop-hunting as round numbers are so often major stop levels. Stops could stretch Apple down to volume support at $90.

We also must take note of the imminent death cross formation where the 50-day moving average crossed below the 200-day moving average. Below $150 Apple remains strongly bearish, only becoming bullish on a break above $165.

AAPL stock daily chart

Apple price target and recommendation

The AAPL stock technical picture confirms our bearish valuation, and we stick with the $100 price target. This necessitates a Sell rating. 

Upside risks to our assumptions:

• Supply chain issues resolve.
• Input costs stabilize.
• Inflation is transitory.
• Chinese demand increases from loose central bank policy – our key risk. China is lowering rates while the rest of the global central banks are tightening. This could encourage middle-class spending in China.
• Major central bank reverse monetary tightening.
• Indian middle-class expansion accelerates quicker than expected. This almost warrants a separate article, but India’s middle class is expanding rapidly (akin to China 20 years ago) and will provide a valuable source of revenue in the 2030s in our view. That is, however, slightly too far out for this analysis. 

Apple reported earnings and forecast tables below, the foundation for all our DCF models. Data taken from Refinitiv (Reuters).

			HISTORICAL (ACTUALS)	FORECAST (MEAN)
	FY Sep-19	FY Sep-20	FY Sep-21	FY Sep-22	FY Sep-23	FY Sep-24
INCOME STATEMENT
REVENUE	260174.000	274515.000	365817.000	394009.918	416241.124	436300.796
Guidance	T	T	T	T	-	-
IPAD	21280.000	23724.000	31862.000	29415.431	30123.957	32126.000
IPHONE	142381.000	137781.000	191973.000	203000.051	211137.811	242105.500
MAC	25740.000	28622.000	35190.000	39838.055	39516.425	44679.000
OTHER PRODUCTS	24482.000	30620.000	38367.000	42420.982	47341.417	59401.333
SERVICES	46291.000	53768.000	68425.000	80133.560	90785.311	140529.333
COST OF GOODS SOLD	161782.000	169559.000	212981.000	223576.260	237413.293	249040.200
GROSS INCOME	98392.000	104956.000	152836.000	170037.095	180553.273	191255.800
GROSS PROFIT MARGIN	37.820%	37.810%	41.780%	43.178%	43.259%	43.610%
Guidance	T	T	T	-	-	-
SELLING & MARKETING EXPENSE	18245.000	19916.000	21973.000	24512.000	28016.000	31351.000
SG&A EXPENSE	18245.000	19916.000	21973.000	25305.640	27401.149	27906.822
R&D EXPENSE	16217.000	18752.000	21914.000	25679.207	28838.565	31977.008
STOCK BASED COMPENSATION	6068.000	6829.000	7906.000	8271.273	8588.000	10703.000
OPERATING EXPENSE	34462.000	38668.000	43887.000	51052.492	57087.446	61479.750
Guidance	-	T	T	-	-	-
EBITDA	76477.000	77344.000	120233.000	131277.435	134949.803	140046.202
EBITDA PER SHARE	4.113	4.410	7.129	8.279	9.059	9.960
DEPRECIATION	12547.000	11056.000	11284.000	11655.010	13121.414	16168.963
AMORTIZATION	-	-	-	11974.000	11837.000	11989.000
DEPRECIATION & AMORTIZATION	12547.000	11056.000	11284.000	11397.088	13038.300	15129.413
EBIT	63930.000	66288.000	108949.000	119475.180	123547.557	128145.237
INTEREST EXPENSE	3576.000	2873.000	2645.000	1063.750	1054.500	2625.000
PRE-TAX PROFIT	65737.000	67091.000	109207.000	119629.151	123994.657	128711.109
TAX PROVISION	10481.000	9680.000	14527.000	19027.015	19715.113	19939.333
TAX RATE	15.944%	14.428%	13.302%	16.029%	15.960%	15.214%
NET INCOME	55256.000	57411.000	94680.000	100137.706	103862.505	108012.128
NUMBER OF SHARES OUTSTANDING	18595.652	17528.214	16864.919	16287.825	15819.445	15576.490
EARNINGS PER SHARE	2.973	3.280	5.610	6.140	6.563	6.914
EBITDA REPORTED	76477.000	77344.000	120233.000	131626.185	136741.280	144314.432
PRE-TAX PROFIT REPORTED	65737.000	67091.000	109207.000	119223.424	123402.747	128534.715
NET INCOME REPORTED	55256.000	57411.000	94680.000	100206.943	104230.979	109448.607
EARNINGS PER SHARE REPORTED	2.973	3.280	5.610	6.126	6.570	6.987
DIVIDEND PER SHARE	0.750	0.795	0.850	0.908	0.969	1.045
Guidance	-	-	T	-	-	-
BALANCE SHEET
CASH AND CASH EQUIVALENTS	48844.000	38016.000	34940.000	74446.125	107420.125	92503.250
INVENTORY	4106.000	4061.000	6580.000	7016.589	7381.847	9626.750
CURRENT ASSETS	162819.000	143713.000	134836.000	157842.800	195851.100	217601.750
TOTAL ASSETS	338516.000	323888.000	351002.000	353268.097	380941.463	439496.000
CURRENT LIABILITIES	105718.000	105392.000	125481.000	135821.900	144143.500	160377.250
CURRENT DEFERRED REVENUE	5522.000	6643.000	7612.000	8105.167	8333.167	8584.000
TOTAL DEBT	108047.000	112436.000	125567.000	120920.000	121389.500	63810.500
NET DEBT	7490.000	21493.000	62928.000	-65497.757	-79660.867	-84864.307
SHAREHOLDERS EQUITY	90488.000	65339.000	63090.000	59919.392	76393.428	107419.457
GOODWILL	-	-	-	4034.333	3269.500	-
NET ASSET VALUE	90488.000	65339.000	63090.000	60595.997	80601.385	122422.800
BOOK VALUE PER SHARE	5.091	3.850	3.841	3.875	4.429	4.989
TANGIBLE BOOK VALUE PER SHARE	5.091	3.850	3.841	3.608	4.575	-
ENTERPRISE VALUE	1002641.567	1987571.923	2523692.600	2434148.837	2478936.762	2475944.821
TANGIBLE BOOK VALUE	90488.000	65339.000	63090.000	59376.105	69036.875	85198.578
CASH FLOW STATEMENT
NET WORKING CAPITAL	57101.000	38321.000	9355.000	46929.250	59294.000	41301.000
INCOME TAXES PAID	15263.000	9501.000	25385.000	-	-	-
CASH FLOW FROM OPERATIONS	69391.000	80674.000	104038.000	122168.783	125775.546	136212.250
CAPITAL EXPENDITURES	10495.000	7309.000	11085.000	10800.701	12102.423	12842.778
Guidance	T	T	-	T	-	-
CASH FLOW FROM INVESTING	45896.000	-4289.000	-14545.000	-24828.300	-8069.500	-12109.000
FREE CASH FLOW	58896.000	73365.000	92953.000	109240.074	112699.320	121908.860
FREE CASH FLOW PER SHARE	3.168	4.190	5.509	6.960	7.326	7.860
TOTAL DIVIDENDS	14119.000	14081.000	14467.000	16883.115	14919.000	15122.750
CASH FLOW FROM FINANCING	-90976.000	-86820.000	-93353.000	-106606.000	-88479.636	-85267.750
CASH FLOW PER SHARE	3.733	4.602	6.170	7.183	7.827	8.543
VALUATION METRICS
RETURN ON ASSETS	15.690%	17.330%	28.059%	28.572%	28.183%	28.500%
RETURN ON EQUITY	55.920%	73.680%	147.439%	156.580%	147.398%	140.181%
RETURN ON CAPITAL EMPLOYED	27.460%	30.340%	48.310%	54.100%	57.000%	56.900%
RETURN ON INVESTED CAPITAL	54.550%	65.190%	74.927%	72.450%	70.050%	-
PRICE/SALES RATIO	-	-	6.059%	6.140%	5.470%	5.120%

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