Apple (AAPL 1.76%) stock didn't start off 2023 on a positive note. Shares of the tech giant slumped on Tuesday following reports that the company had cut orders for MacBooks, Apple Watches, and AirPods. If those reports are accurate, Apple could be adjusting for lower-than-expected demand.
Shares of Apple are now down a bit more than 30% from their all-time high reached at the start of 2022, and the company's market capitalization has fallen below $2 trillion. While this big decline may have some investors salivating at the prospect of picking up shares on the cheap, Apple stock is far riskier than it appears.
Pandemic tailwinds are gone
While it wasn't clear at the beginning of the COVID-19 pandemic how Apple would be affected, demand for its products has soared. Revenue surged 33% in fiscal 2021, which ended in September of that year, and rose another 8% in fiscal 2022. Profits have also exploded. The company earned net income of $99.8 billion in fiscal 2022, up from $57.4 billion in fiscal 2020.
Is this the new normal for Apple? Probably not. Companies that saw booming demand during the pandemic are now, generally speaking, seeing that demand unwind to a degree. The PC market, in which Apple competes with its MacBooks, was on fire in 2020 and 2021. Then demand unexpectedly fell off a cliff. Global PC shipments tumbled nearly 20% year over year in the third quarter of 2022.
Demand for Apple's products may hold up better than the broader markets in which they compete, given the company's strong brand and pricing power. But Apple is certainly not going to be immune from this downturn. Not many consumers are going to switch from iPhones to Android devices, but some may push back upgrades. Customers looking to cut down on spending can easily defer purchases of all of Apple's products.
If the average iPhone upgrade cycle were to increase by a few months, that would have a significant impact on Apple's results. The company does have the benefit of a large and growing services segment, but it's unclear how much profit products like Apple TV+ contribute.
With Apple stock slumping over the past year, the stock market seems to be betting that the company's pandemic-era growth is going to stall out or reverse.
Not as cheap as it looks
If you take Apple's net income from fiscal 2022 and use it to calculate a price-to-earnings ratio, Apple stock trades for just under 20 times earnings. That doesn't seem unreasonable given Apple's dominant market share and incredible profit margins.
But are those profits sustainable? If pandemic-era demand is in the process of unwinding, it would stand to reason that Apple is going to have trouble preventing the bottom line from declining at least somewhat. If demand was pulled forward over the past two years, there's going to be some sort of reckoning in 2023.
Analysts are predicting essentially flat per-share earnings and barely any revenue growth in fiscal 2023 for Apple, but that may be overly optimistic. The last time Apple went through a recession, excluding the brief pandemic-driven one in 2020, the company was tiny in comparison. Apple's revenue in 2008 was just $32.5 billion, and the iPhone was just a year old. In its current form as a mega tech company, Apple has not been through a real recession before. No one knows how the company's results will hold up.
If you assume Apple's net income will fall back to fiscal 2020 levels, the price-to-earnings ratio is more like 35. That may be overly pessimistic, but it also may not be. Again, uncertainty is through the roof right now. What seems very unlikely, though, is any sort of meaningful profit growth in 2023 for Apple.
It's not clear whether Apple stock is reasonably priced or expensive because demand for its products and the trajectory of its revenue and profits are all wildcards. If Apple does see demand tumble this year, the stock's decline could be getting started.
