Month: March 2024

Investing.com — Apple fell double digits in the first quarter as concerns about weak iPhone demand and regulatory headwinds weighed, but some on Wall Street suggest taking a closer look at the stock as the slump has dragged its value well below historical averages and its fundamental business model remains intact. 

“We are more constructive on Apple,” analysts at Bernstein said in Thursday note, highlighting the stock’s underperformance following the slump year-to-date and poor investor sentiment.  “Our belief that its fundamental business and financial model are intact,” the analysts added.   

Apple Inc (NASDAQ:AAPL) fell 11% in Q1, pushing its valuation to well below five-year averages, and the stock is trading at about 24 times next year’s earnings, which is not a “terrible price to pay,” Bernstein said.

Slowing iPhone sales, particular in China, has proved fertile ground for bearish bets and added to worries that Apple’s business in maturing. But the release of the iPhone 16, expected to be equipped with artificial intelligence, could spark a strong upgrade cycle.

While AI powered smartphones aren’t new and Apple may behind the curve, history shows that the iPhone maker doesn’t need to be first nor convince Andriod users to switch, but rather persuade its existing 1.2M iPhone users to upgrade.    

“When Apple does well and has a good cycle, it’s because more people are replacing their phones. It’s not because they’re getting a lot more switchers from Android, necessarily, or they’re getting a lot of new users,” the analysts said.

Still, the bears would argue that hopes of a new iPhone leading to a super upgrade cycle have previously fallen short, leaving plenty room for skepticism on whether an AI-powered iPhone will have enough razzle dazzle to spur upgrades. 

Margin-rich services story remains in intact

But slowing or stagnant iPhone sales is hardly news. . . 

iPhone sales reached 230 million units in 2015, has been around that level ever since. During this period of maturing iPhone sales, Apple has, however, continued to churn out double digit earnings growth. 

This suggests that solely focusing on Apple’s iPhone sales risks loosing sight of the fundamental driver of growth: services.  

Services is a key part of the growth driver, led by the App store and licensing fees, which are payments from Google (NASDAQ:GOOGL), and advertising, collectively is over 50% of Apple services revenues and it’s more than 60% of the gross profits, Bernstein estimates. 

Significant regulatory headwinds — still a long way to go

Apple’s App store practices, however, have come under scrutiny not least in Europe, where a sweeping new law, the Digital Markets Act, has given lawmakers extra clout to go after big tech and force them to open up their platforms to allow users more choice. 

But App store revenue in Europe makes a just a meagre 7% slice of global App store revenue, and just 1% of Apple’s revenue. The bigger risk is if those same regulatory headwinds appear in the U.S., but for now the Department of Justice’s case in the US is much “more about trying to open Apple up,” Bernstein argues.

There doesn’t appear to be “any direct legislation either on advertising or on the App Store,” the two big profit drivers in the services business, likely keeping this key growth engine intact. 

Tesla (NASDAQ:TSLA) stock fell 2.3% on Thursday, extending its year-to-date drop to 29.3%. This way, Tesla stock is one of the worst S&P 500 performers in 2024.

According to Citi equity analysts, the TSLA stock weakness on Thursday is attributed primarily to two key factors. 

Firstly, the launch of Xiaomi (OTC:XIACF)’s SU7 vehicle and its competitive pricing range has stirred concerns about intensifying competition in the already crowded China New Energy Vehicle (NEV) market. 

This is seen as a potential threat to Tesla’s market position in the region. 

Xiaomi launched its first electric vehicle (EV), the SU7, on March 28. The event unveiled the addition of an SU7 Pro edition, not previously announced during the soft launch, bringing more variety to Xiaomi’s automotive lineup. 

The SU7 series is priced competitively, with the base model starting at Rmb215.9k, the SU7 Pro at Rmb245.9k, and the SU7 Max at Rmb299.9k, aligning with the initial price range expectation of Rmb200-300k.

“We currently forecast EV shipment of 60k/131k/252k units for 2024/25/26E,” Citi analysts said.

Secondly, ongoing worries about Tesla’s first-quarter deliveries continue to weigh on investor sentiment, adding to the bearish outlook for the day. Several Wall Street analysts cut their deliveries estimates in recent days, which is further weighing on stock as consensus continues to come down.

Deutsche Bank analysts cut the price target on Tesla stock this week.

“We continue to see pressure on margins and earnings, as the company already announced deep price cuts in both China and Europe earlier in the quarter, and made further moderate price adjustments in February to incentivize vehicle purchases,” Deutsche Bank analysts wrote. 

“Although Tesla has announced it will raise prices in the U.S. and China effective April, we view it as an attempt to boost sales in March, rather than a sign of solid demand.”

Despite the immediate negative impact on Tesla shares, Citi analysts view the situation as a broader indicator of the undervalued potential within the traditional automotive sector.

“Looking beyond Tesla, events such as this reinforce our long-held positive view around the overlooked value of GM’s and Ford’s respective NA Truck/Commercial franchises–end markets showcasing both strong growth & defensive qualities,” Citi analysts added.