The markets are having a tough year so far, with the S&P 500 declining by about 18% year-to-date, amid surging inflation, tighter monetary policy, and rising interest rates. Tech stocks have fared much worse, as investors rotate into value and cyclical bets, with the Nasdaq-100 down by close to 29% year-to-date. Even Apple stock (NASDAQ:AAPL), which has always been considered a safe haven of sorts, hasn’t really been immune to the sell-off, declining by about 23% year-to-date as investors worry about the impact of the Covid-19 lockdowns in China, which could hurt supply for the company and also due to concerns that the U.S. could slip into a recession following a contraction in GDP over the first quarter of this year. However, we think Apple still looks compelling in the current situation, with our $179 price estimate for the stock coming in about 27% ahead of the current market price. There are a couple of reasons for our stance on Apple.
Now, Apple’s growth rates are expected to cool over FY’22, as the demand from the remote working and learning trend seen through the pandemic eases, with Apple’s flagship product, the iPhone 13, likely witnessing slower growth compared to the iPhone 12. Moreover, if the U.S. does indeed slip into a recession, people could scale back on discretionary spending, and this could impact Apple’s volumes. That said, Apple’s computing products are increasingly indispensable and this could help sales hold up to some extent. Moreover, continued growth in the company’s services business should also provide a fillip to revenue in the event of a downturn, given that services sales are typically very sticky. Apple has also been increasingly efficient in managing its costs, despite the ongoing supply chain issues and semiconductor shortage. Overall, we continue to project that Apple revenue will grow by about 10% in FY’22. For perspective, over Q2 FY’22, when a bulk of the consumer electronics industry was reeling from semiconductor issues, Apple actually grew its gross margins to 43.7%, near all-time highs, driven by a more favorable product mix, higher services sales, and rising volumes.
While Apple’s growth could hold up, shareholder returns should be magnified by Apple’s massive stock buyback program. Apple has bought back an average of about 5% of its stock each year over the last five years. Apple Valuation also appears reasonable, relative to historical levels. The stock trades at a forward P/E of roughly 23x currently, down from around 31x in 2021 and 38x in 2020. This could make the stock a reasonable pick in the current market. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.
|S&P 500 Return||-5%||-17%||76%|
|Trefis Multi-Strategy Portfolio||-8%||-23%||201%|
 Month-to-date and year-to-date as of 5/25/2022
 Cumulative total returns since the end of 2016