Apple continues to outperform FAANG peers amid economic turmoil

Apple shares (NYSE: AAPL) rose sharply last week amid the rally in wider markets. It has been the best-performing FAANG share of 2022 so far amid the economic turmoil.

On Thursday, AAPL added almost $191 billion to its market cap as US shares soared after the release of CPI data. US inflation rose at an annualized pace of 7.7% in the month which was lower than the 7.9% that analysts expected. Also, it marked the first time since February that CPI fell below 8%.

Apple is outperforming FAANG peers

To be sure, Apple’s performance stands out when compared with FAANG peers. This earnings season, only Apple and Netflix from the FAANG pack rose after releasing their earnings for the September quarter. The remaining three constituents fell after the earnings release as they spooked markets with the earnings and guidance.

Apple’s revenues increased 8.1% YoY to $90.15 billion in the September quarter while analysts expected the metric to come at $88.90 billion.  Its iPhone revenues soared 9.67% to $42.63 billion. The sharp growth in iPhone revenues pleased markets as global smartphone volumes plunged by double digits in the quarter.

Apple’s earnings were better than expected

Apple’s EPS of $1.29 was also higher than the $1.27 that analysts were expecting. The company did not provide guidance for the December quarter but said that revenue growth would be below what it delivered in the September quarter.

While the Services business’ revenues increased by only 5% in the quarter, Apple sounded bullish on the segment and said that it has 900 million paid subscribers.

It said, “We reached another record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switchers on iPhone. Across nearly every geographic segment, we reached a new revenue record for the quarter.”

Apple is a cash-rich company and ended the September quarter with net cash of $49 billion. During the quarter, it returned $29 billion to shareholders of which $3.7 billion was in dividends and the remaining in share buybacks.

Apple is facing supply chain issues in China

During the earnings call for the fiscal fourth quarter of 2022, Apple said that the impact of supply chain disruptions was minimal in the quarter. However, things are not looking good in the current quarter amid the rising Covid cases in China.

Earlier this month, Apple said, “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.”

These supply hiccups are coming just ahead of the holiday shopping season in the US. Apple is optimistic about the demand outlook for iPhone 14 though and said, “We continue to see strong demand for iPhone 14 Pro and iPhone 14 Pro Max models.”

However, the company added, “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.”

Apple shares fell after the news but have since rebounded as China has relaxed some of its Covid restrictions. The lockdowns are only amplifying the slowdown in China.

China’s slowdown

The Chinese economy has slowed down. China’s exports fell 0.3% YoY in October. Analysts were expecting exports to rise 4.3% in the month. This is the first time since 2020 that China’s exports in dollar terms have fallen on a yearly basis. China’s dollar-denominated imports also fell 0.7% in October. Analysts were expecting them to rise 0.1% YoY in the month. The fall in imports is a sign of slowing growth in China. Chinese GDP rose 3.9% in the third quarter. The data was delayed amid the Politburo meeting in China but was better than expected.

Meanwhile, economists polled by Reuters expect Chinese GDP to increase by only 3.2% this year. The country is officially targeting a growth of 5.5% this year which looks unlikely with each passing day.

Soaring US-China relations are a risk for Apple

Apple investors would closely watch this week’s meeting between US President Joe Biden and Chinese President Xi Jinping. The soaring US-China relations are a risk for Apple. For Apple, China is a major market and also a sourcing hub. In the past also, the company has faced boycott calls in China. However, it downplayed the risks and said that it did not have a material impact on sales.

Apple is anyways battling a severe slowdown in China where the intermittent lockdowns have taken a toll on sales. Business Insider reported that Apple has cautioned its suppliers against using “Made in Taiwan” as it would only flare up the troubles.

While Apple has been trying to diversify its supplier base after the US-China trade war, the company still heavily relies on Chinese suppliers. Counterpoint Research believes that Apple would take years to diversify its supplier base from China.

Analysts on AAPL shares

Morgan Stanley continues to be bullish on Apple shares despite the supply chain hiccups. In a note, it said, “iPhone 14 Pro/Pro Max lead times have risen to record highs as COVID restrictions disrupt supply, although we don’t believe the situation has worsened since Monday.”

Morgan Stanley advised buying Apple shares as its PE multiples approach 20x. Currently, Apple trades at an NTM (next-12 months) PE of around 24x. The multiples have corrected from their 2020 highs when they surpassed 35x. However, the PE multiple is still higher by historical standards.

However, analysts generally agree that Apple can command higher multiples than its historical averages as it scales up its high-margin Services business.