Apple (AAPL +0.29%) CEO Tim Cook just passed his successor an absolute mess. Cook steps down on Sept. 1 from his role as CEO but will remain on the board. In his place, John Ternus will assume the role of CEO. However, the situation Ternus is taking over isn't a pretty one.
What's going on with Apple that caused this problem? Rising commodity prices.
Image source: The Motley Fool.
Memory chip prices could severely affect Apple's business
During Cook's last earnings call, he stated that rising memory chip prices are undergoing a "100-year flood." Essentially, nobody could have seen this coming, and the effects could be disastrous. He noted that Apple already had to raise prices on some products, but it may not be able to stop at just a few product lines. If prices continue to rise, it could force Apple to raise prices again, alienating some of its consumer base, which is already stretched thin.
However, Cook noted that it is decreasing costs on other components that help offset rising memory chip prices. We'll see how this pans out, but if prices continue to rise, it could get ugly for Apple and cause John Ternus to deal with a crisis just a few months into the job.
To make matters worse, Apple's stock is priced for perfection. For the most part, Apple has executed nearly flawlessly under Cook's leadership. This has led to a sky-high valuation.
AAPL PE Ratio (Forward) data by YCharts
Apple now trades at 35 times earnings, regardless of whether you use forward or trailing earnings, indicating zero growth for the rest of the current fiscal year. While 35 times earnings is already expensive enough, when a stock isn't growing, it seems a bit absurd.
For comparison, the S&P 500 trades for 25.2 times trailing earnings and 21 times forward earnings. Nvidia, the company vying for the title of the world's largest company against Apple, is growing at an impressive 85% year-over-year pace. Yet its stock trades for 34 times trailing earnings and 24 times forward earnings, making it seem like a much better value.
With Apple's stock priced for perfection and a perfect storm brewing in the memory chip market, it could sink Apple's ship. Apple is a very powerful company with significant pricing power, but there is only so much it can do to offset rising memory prices. We'll see how this plays out, but it will be a very difficult test for new CEO John Ternus over the next few years.
