A Recession Could Take Apple Back To $140

Apple (NASDAQ:AAPL) stock is down ~25% from its February highs, as the spread of the novel Coronavirus rattles the stock markets and the broader economy. While Apple has outperformed the S&P thus far through the crisis, likely due to its growing mix of services (~30% of Apple’s profits), there is a very real possibility that the economy could slip into a recession, hurting demand for Apple’s increasingly expensive products. We estimate that Apple’s stock price could decline to levels of around $140 if its revenues fall by 15% vs FY’19, its margins contract by 100 bps, and its valuation multiple falls to levels of around 14x, down from around 19x at the end of FY’19. Below, we summarize a possible downside case for Apple.  Our dashboard Apple downside of $140 discusses our 2020 expectation for iPhone, Wearables, and Apple’s Services businesses.

#1.Apple’s Total Revenues could decline to $221 billion by FY’21, down from $260 billion in FY’19, if sales of iPhone and other products decline.

• This assumes that iPhone revenues decline by about 20% this year and by 5% over FY’21, on account of weaker demand and potential supply constraints.
• Customers have been increasingly holding on to their existing smartphones (33 months in the U.S.) and this trend is only likely to accelerate in a recessionary environment.
• Apple’s other hardware sales could also decline from $71 billion to about $58 billion, although we believe that Services sales could continue to grow.

#2 Apple’s EPS could decline to levels of $10, from $12 in FY’19, if Net Income Margins shrink 100 bps and Shares Outstanding starts to flatten out if Apple curtails share repurchases.

• If Apple’s Net Margins decline from 21.2% in FY’19 to 20.3% by FY’21, with share count remaining roughly flat, assuming that Apple scales back on its capital return program, EPS could stand at $10 in FY’21.

#3 Arriving at Apple’s valuation:

• Apple stock could fall to levels of $140 if the P/E declines to about 14x with EPS falling to about $10 by 2021.
• Apple’s P/E has seen sharp declines in the past. For instance, over the Great Recession, Apple’s P/E declined from 39x at the end of 2007 to 12x in 2008.

Some of our other analyses discuss Apple’s Services Revenue, Will Apple TV+ Challenge Netflix and Disney, and Apple Immune to COVID-19 Crisis?

See all Trefis Price Estimates and Download Trefis Data here

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