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Aug 26, 2023

Apple sheds $1trn: How can AAPL restore its market cap in 2023?

By Jenny McCall 12:53, 5 January 2023 "New Year, new me" maybe the mantra

By Jenny McCall

12:53, 5 January 2023

"New Year, new me" maybe the mantra for tech giant Apple (AAPL) right now, as it was announced on Wednesday that it had lost $1trn over the last 12 months from its market capitalisation. It's a stark contrast to where the tech giant was a year ago.

On 3 January 2022, AAPL was celebrating after becoming the first US company to be valued at $3trn – but a lot can happen in a year and now 12 months on its market cap has fallen below $2trn and its stock price plummeted 26% in 2022.

A strong US dollar, declining consumer confidence, rising inflation and supply chain issues in China - which hurt iPhone 14 production, have all been contributing factors to Apple's poor start in 2023 and joining Amazon (AMZN) - which also lost $1trn in market cap last year.

AJ Bell investment director Russ Mould wrote in a note: "Amazon has already managed this feat, but it has coughed up a couple of profit warnings along the way, something that Apple has yet to do.

"Investors will now look for reassurance from the first-quarter results from chief executive Tim Cook and chief financial officer Luca Maestri and they usually come out in late January."

So, AAPL has had a bite taken out of it - but can it regain momentum in 2023?

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AAPL, unlike its MAANAM companions did not miss analysts’ expectations last year, nor did it issue a profit warning, unlike Meta (META), Netflix (NFLX) and Alphabet (GOOG).

"Apple did grow its sales and earnings yet again in the last reported quarter, the three months to the end of September. iPad sales stumbled once more, but wearables and accessories again performed strongly, and September's launch of the iPhone 14 helped that revenue stream," Mould adds.

But Apple needs to regain some ground.

As a result, it looks like the tech giant will loosen its reliance on Foxconn (HNHPF), its main iPhone manufacturer in Asia, and recruit other firms in the region to assemble its gear.

Foxconn came under fire last year when rumours of an iPhone production disruption started to swirl in the summer.

Those rumours were made official, as Apple announced in November the following: "We now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated and customers will experience longer wait times to receive their new products."

"COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity."

The Zhengzhou campus, which is owned by Foxconn and known as iPhone city, employees 200,000 people. Foxconn produces 70% of iPhones globally.

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NVDA

AAPL

META

This admission that shipments of the new iPhone would be delayed due to Covid, no doubt tested the faith of many shareholders in AAPL.

Apple is now looking to diversify its supply chain and, according to reports, is set to sign its first big order with Luxshare Precision, which is a Chinese competitor to Foxconn.

Rumour has it that Luxshare has already started producing the iPhone 14 Pro Max at its plant near Shanghai, along with the hope is that this will help make up for the loss of production by Foxconn.

Reports have also stated that AAPL plans to start to source its iPhone and Mac chips from Taiwan Semiconductor manufacturing's new plant in Arizona.

"Even though Apple has been derated, through the process of that $1 trillion market cap loss, it still trades at a premium to the wider US market, as does the wider MAANAM grouping. Based on consensus earnings forecasts, the sextet trades on 21 times earnings for 2023 compared to 17 times for the S&P 500 benchmark index," Mould said.

Price/earnings ratio (x)

Net income ($ billion)

2022E

2023E

2024E

2022E

2023E

2024E

Alphabet

18.4 x

16.8 x

14.8 x

62.8

68.8

78.1

Amazon

neg.

49.6 x

28.2 x

(0.9)

17.7

31.1

Apple

20.5 x

19.4 x

18.7 x

97.4

103.1

106.6

Meta Platforms

13.5 x

14.8 x

12.4 x

24.2

22.1

26.3

Netflix

28.2 x

27.2 x

21.2 x

4.6

4.8

6.2

Microsoft

25.0 x

21.5 x

18.3 x

71.5

83.0

97.6

MAANAM total

24.2 x

21.0 x

18.1 x

259.6

299.4

345.

Source: Zack's, NASDAQ, Marketscreener, consensus analysts’ forecasts, Refinitiv data

Acquisitions could also be on the cards for Apple in 2023: the purchase of media or a video gaming business could help the stock to expand its reach.

It's also thought that the company will continue its buyback programme. In 2022 Apple bought back $90bn worth of its shares and, since its programme began in 2013, has spent more than $550bn in stock buybacks.

Experts also believe if we see a reversal in 2022's problems - the dollar weakens, China bounces back, easing supply chain issues and inflation rates calm down - this will have a knock-on effect on consumer confidence and spending power, which could cause AAPL shareholders to breathe a sigh of relief.

Nevertheless, the risks to Apple not making a strong comeback in 2023 are still high and many of the supply chain changes it is currently implementing may not bear fruit until 2024 or 2025. There is also the idea that "lofty valuations" have simply caught up with the company.

"Those who are tempted to argue that 2020-22 featured bubble, blown by cheap central bank liquidity, may hark back to the bursting of the last tech bubble in 2000. The NASDAQ peaked at 5,049 in March 2000 and then took 15 years to get back there, so extreme had valuations and high expectations become," Mould concluded.

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