Shares of Apple (AAPL 5.98%) slipped last week following a quarterly report that was mostly bad news. Revenue slumped, operating income was down, and the iconic iPhone suffered a sales decline. Apple's sprawling services segment was a bright spot, but it wasn't enough to push the headline numbers higher.
Apple stock had been rallying this year, briefly pushing the company's market capitalization above $3 trillion. Shares have now dipped below that level. Given Apple's optimistic valuation, the stock may be stuck for quite some time below the $3 trillion mark.
Slumping sales
The pandemic is over, and that's not good news for sales of Apple products. Consumers aren't snapping up iPhones and Macs like there's no tomorrow anymore.
Apple's fiscal third quarter, which ended July 1, was far from impressive. Total revenue sank 1.4% year over year, driven by a 4.7% decline in product revenue. The iPhone, which accounts for nearly half of Apple's total revenue, suffered a 2.5% sales decline. Sales of Macs were down 7.3%, while sales of iPads tumbled 19.8%. Looking ahead to the fourth quarter, Apple expects its total revenue to decline by a similar amount, and for both Macs and iPads to suffer double-digit declines.
Sales in the wearables, home, and accessories segment were up 2.5%, while services revenue rose 8.2%. Services revenue topped $21 billion in the third quarter, but it still wasn't big enough to overcome declining hardware sales.
While Apple's earnings per share increased to $1.26 in the third quarter, compared to $1.20 in the prior-year period, that earnings growth was the result of a lower tax rate and share buybacks. Operating income was down slightly year over year.
Tough to justify
Apple is a highly profitable company. On $81.8 billion in revenue in the third quarter, the company generated $19.9 billion of net income.
How much you're willing to pay for a stock depends not only on what earnings look like today, but also on what they'll look like in the future. Apple isn't growing right now, and it's difficult to see a path forward that's any better than sluggish growth. The iPhone business is mature, and while services revenue is growing, it's not growing all that fast.
Apple has at least one moonshot coming up in the form of its Vision Pro mixed reality headset. But the $3,500 device is unlikely to move the needle initially given the sky-high price tag, and it may never be a hit. The product looks like a solution in search of a problem.
Apple's market capitalization sat at $2.86 trillion at the end of last week. Based on the average analyst estimate for full-year earnings, Apple stock trades for more than 30 times earnings. Excluding the pandemic, this is the most expensive Apple stock has been in at least a decade. Does that make sense? In my opinion, no.
In an ultra-low interest rate world where the risk-free option provides basically no return at all, paying 30 times earnings for Apple stock could be a reasonable thing to do. But that's not the world we live in anymore. Investors can get a 5.5% annual return buying short-term U.S. . Paying through the nose for a no-growth stock like Apple is incredibly risky.
Maybe Apple's Vision Pro will be a surprise hit and restart the company's growth. Or maybe Apple has another major product launch up its sleeve. But the most likely scenario looks like sluggish hardware growth coupled with somewhat less sluggish services growth. To me, paying 30 times earnings for that isn't appealing at all. I'll take another look if and when Apple trades for a more reasonable price.
