Will New iPhones Help Apple Stock Offset A China Slump?

AAPL: Apple logo

Apple (NASDAQ:AAPL) released its new iPhone 15 devices at a special event on Tuesday, offering incremental upgrades over last year’s models. There were no big surprises on the product front, and Apple didn’t boost prices across the Pro lineup as Wall Street had been anticipating, causing the stock to fall by almost 2%.

Notably, AAPL stock had a Sharpe Ratio of 0.9 since early 2017, which is better than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The flagship Pro and Pro Max models are now built with titanium casings and offer the usual upgrades relating to imaging and processing power. The basic iPhone 15 and 15 Plus models sport largely similar designs to last year, although they offer better processors, and cameras and sport the dynamic island notch notifications system, which was previously limited to the Pro. The iPhone 15 starts at the same $800, while the Pro model begins at $1,000 – marking the seventh consecutive year Apple has held on to the price point for its flagships. That said, the Pro Max model now omits a 128 gigabytes model and starts with 256 GB of storage, meaning that base model prices are up by $100 versus last year.

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So how are the new devices expected to impact Apple’s financials? Despite the lack of price increases, Apple could see average selling prices trend higher, as the pricier Pro devices now appear more appealing with exclusive features such as higher refresh rate screens, the latest processors, and camera tech, as well as more premium casing materials. That said, volume growth could remain muted through this upgrade cycle, given the saturation in the broader smartphone market and headwinds in China following the government’s move to ban the use of iPhones and other foreign cellphones among central government workers. However, Apple has done a good job with managing its margins in recent years, despite holding prices flat driven by a more favorable sales mix and potentially improving supply of semiconductor components.  Q3 FY’23, the most recent quarter, reported 35.4% product gross margin, compared to 34.5% in the year-ago quarter. We largely expect margins to hold up with the new launches as well.

Apple stock has declined by about 6% over the last five trading days, due to concerns about the Chinese market and a lackluster reception to the new iPhone launch. However, we think the stock is still overvalued at current levels of about $176 per share. Apple currently trades at over 28x forward earnings, which is high relative to historical levels. Moreover, Apple’s earnings are poised to contract this year per consensus estimates, with revenue growth projected to remain slow over the next year as well. We value Apple at about $168 per share, about 6% below the market price. See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

 Returns Sep 2023
MTD [1]
YTD [1]
Total [2]
 AAPL Return -6% 36% 509%
 S&P 500 Return -1% 16% 99%
 Trefis Reinforced Value Portfolio -2% 28% 559%

[1] Month-to-date and year-to-date as of 9/13/2023
[2] Cumulative total returns since the end of 2016

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