The Expected Success of New iPhones Is Offset By Apple’s Rich Valuation

Apple, Inc. (AAPL), the most valuable company in the world with a market capitalization of $3.3 trillion, may potentially benefit from a new smartphone upgrade supercycle arising from the expected success of its new iPhone 16 series. However, Apple’s rich valuation limits the investment appeal of the company. Although I believe Apple will continue to see modest revenue growth in the next five years, I am bearish on the prospects for Apple stock as I believe its valuation is already ahead of its economic reality.

The iPhone 16 Series Marks a New Beginning for Apple

Although I am bearish on Apple, there’s no denying the possibility of a few strong quarters for the company. Apple launched the iPhone 16 series on Sep. 9 during the It’s Glowtime special event. The new lineup of devices, which are available for pre-orders currently, will hit stores around the world on Sep. 20. The launch of the iPhone 16 marks a new beginning for Apple as these devices will be equipped with Apple Intelligence, a suit of AI features developed by the company. Key AI features include AI content generation tools, enhanced personal assistance features for Siri, visual intelligence features through the camera control button, and AI-powered photo management. In addition, future iOS updates are expected to provide users with access to ChatGPT directly through Apple’s applications.

According to Wedbush Securities analyst Dan Ives, the aforementioned AI features will lure many existing iPhone users to shift to the latest models, resulting in a smartphone upgrade supercycle. A similar phenomenon occurred when Apple launched the iPhone 12 series which marked the first Apple smartphone with 5G capabilities. In the fourth quarter of 2020, Apple shipped a record 90.1 million smartphones aided by the strong demand for 5G-enabled devices. According to Counterpoint Research, when 5G smartphone penetration surpassed 4G penetration for the first time in January 2022, Apple dominated the North American market, accounting for more than 50% of all 5G-enabled smartphones sold.

If Apple enjoys a similar upgrade supercycle with the release of the iPhone 16 series, the company is likely to enjoy above-average revenue growth in the next few quarters. For context, Apple iPhone revenue hit a record high of $65.6 billion in the first quarter of Fiscal 2021 which ended on Dec. 26, 2020. When the iPhone 13 was released a year later, iPhone revenue reached a new all-time high of $71.6 billion in the first quarter of Fiscal 2022.

Apple Has a China Problem

Despite Apple’s potential to benefit from a smartphone upgrade supercycle, Apple is likely to face growth challenges in the world’s largest smartphone market, China. These struggles have contributed to my bearish stance on the company. In the second quarter, Apple’s share of the smartphone market in China was 13.6%, positioning it as the 6^th largest smartphone seller in the country. Huawei’s market share jumped more than 50% YoY to 18.1%, making it the second largest player in this market behind Vivo. With Apple losing its place among the top five smartphone sellers in China, domestic companies now dominate the top positions in this all-important market.

A closer evaluation of Apple’s inability to grow its market share in China reveals that the company has failed to cater to the changing consumer preferences in this market. For instance, Apple has shown no interest in introducing a foldable smartphone despite the growing popularity of such devices in China. In fact, Huawei’s recent market share gains have come on the back of the success of the Mate 60 Pro launched in August 2023. The Chinese tech giant is also gearing up to ship the first triple foldable smartphone, Mate XT, on Sep. 20, coinciding with the shipment of Apple iPhone 16 devices.

Industry forecasts suggest Apple is missing out on one of the most important developments in the smartphone space. According to IDC, global foldable smartphone shipments will reach 25 million devices this year, up 38% from 18.1 million units last year. Through 2028, foldable smartphone shipments are expected to grow at a CAGR of more than 20%, easily outpacing the broad smartphone market growth. Apple’s competitors such as Huawei and Samsung are well-positioned to benefit from this growth, likely at the expense of Apple.

Apple is Richly Valued

Amid the ongoing challenges the company is facing in China, Apple’s current valuation seems disconnected from the economic reality facing the company. AAPL is currently valued at a price-to-earnings ratio of 33x, significantly above the 5-year average of 27.88x. Although it is perfectly normal for a company that is growing in leaps and bounds to consistently trade above historical multiples due to the expected positive impact from new projects and acquisitions, Apple does not fit this description. In fact, Apple’s revenue growth has decelerated from 33.26% in Fiscal 2021 to just 0.43% in the past 12 months.

Making matters worse, the iPhone 16 doesn’t appear to be having a great start. According to data gathered by widely followed Apple analyst Ming-Chi Kuo, Apple sold approximately 37 million new iPhone 16 units in the first weekend since launch, down almost 13% from the opening weekend sales for the iPhone 15 last year. In China, online retailers are already offering the new iPhone 16 devices at a discount to the official launch price, which suggests demand is not as strong as expected.

Apple’s struggles in China coupled with the lackluster start to iPhone 16 sales suggests that, from a historical viewpoint, the company’s current valuation is unreasonable. Apple insiders have sold more than $24 million worth of shares in the last three months against no new purchases, which may be one sign that the company’s valuation won’t be sustainable.

Is Apple a Buy, According to Wall Street Analysts?

Despite concerns regarding the current valuation, some analysts remain optimistic on AAPL. Based on the ratings of 32 Wall Street analysts, the average Apple price target is $249.83, which implies upside potential of 13.5% from the current market price.

Although analyst projections point to modest gains in the foreseeable future, I believe the risk-reward profile of investing in Apple is not favorable today given the expensive valuation and the company’s struggles in China.

Takeaway

Apple is expected to make it big with the launch of the iPhone 16 series, but the company’s rich valuation seems to account for this expected growth already. With the company experiencing a major deceleration in revenue growth, paying historically high earnings multiples to invest in the company does not seem like a prudent decision. Although the tech giant remains a wonderful business, valuation concerns have me on the sidelines for now.

Disclosure.