Apple loses a trillion dollars of market cap in a year

AJ Bell press comment – 4 January 2023

• Apple becomes second major tech stock to lose $1 trillion of market cap after Amazon
• Strong dollar, supply chain woes and COVID in China weigh on sentiment
• No profit warning but growth already slowing across the business
• All eyes now on first-quarter results (usually late January)

“Super-spy Austin Power’s nemesis, Dr. Evil, used to get his millions, billions and trillions mixed up when he tried to hold the world to ransom, much to the confusion of his partners in crime, but shareholders in Apple may not be laughing after seeing the stock shed $1 trillion in market cap, or one-third of its value, over the past twelve months,” says AJ Bell investment director Russ Mould. “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.

“Apple stands in marked contrast to Meta, Amazon, Netflix, Google’s parent Alphabet and Microsoft, as it did not issue a profit warning or miss analysts’ expectations during calendar 2022.

“However, a stronger dollar, a softer economy, sagging consumer confidence, supply chain disruption in China hurting iPhone 14 shipments and competition are all possible reasons for the slump in Apple’s shares, as all may be contributing to a slowdown in earnings growth at the Cupertino, California-based giant.

“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.

Company accounts. Fiscal year to September.

“However, earnings momentum was still modest, as earnings per share grew by just 3% year-on-year.

Company accounts. Fiscal year to September.

“Apple has been through several profit cycles over the past decade, driven by new product launches, the economic backdrop or a combination of the two.

“Given how fiscal and monetary stimulus, coupled with lockdowns, boosted demand for electronic gadgets it is perhaps no surprise to see a slowdown now, just as we are in other areas of consumer expenditure on goods, especially now inflation is taking a chunk out of disposable income and stimulus is no longer on offer from either central banks or governments.

“Apple seem to be coping better than others, but its huge market cap may have been the biggest challenge of all.

“At its peak, Apple’s market cap was $3 trillion, more than the GDP of the United Kingdom. That is a hefty price tag for any firm, no matter how profitable, when the efforts of 170,000 staff are deemed more valuable that the combined output of 70 million people (although some may argue that is more of a statement on the state of the UK right now).

“Central banks are now withdrawing liquidity, not pumping it in, and that could be draining strength from Apple’s shares. At the moment, all the stock has done is round-tripped back to late 2020, when central banks and governments were throwing cash at the economy in their fight to fend off the events of the pandemic and lockdowns.

Source: Refinitiv data

“Apple has now joined Amazon in losing $1 trillion in market cap from its all-time high. Meanwhile, Alphabet has shed $840 billion, Microsoft $785 billion, Meta Platforms $745 billion and Netflix $174 billion.

“Between them the six MAANAM stocks (or FAAANG as they once were) may still be worth $6.2 trillion, but they have still lost $4.2 trillion in market cap from their individual highs to teach investors two costly lessons:

• First, valuation always matters (even if you never know when). Overpaying turns even good firms into bad investments.
• Second, there are few worse investments than a growth company that is perceived to be going ex-growth, or at least suffering a major slowdown in momentum. Earnings estimates fall (the ‘E’ in the price/earnings ratio, or PE) and the price that investors are prepared to pay to access those earnings (the ‘P’ in the PE) goes down too, as confidence ebbs, to create a painful double-whammy.

“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.

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

“If some of 2022’s problems reverse – the dollar weakens, China bounces back quickly, supply chains ease and inflation and interest rates ease, to both boost consumer confidence and spending power – then holders of the MAANAM stocks may fancy them to make a comeback in 2023.

“Equally, there is a danger that lofty valuations have simply caught up with them. 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.”

Source: Refinitiv data