Apple’s financial performance has been strong over the last two years, driven by surging demand for computing devices as the remote working and learning trend accelerated through the pandemic. For perspective, in FY’21, Apple’s AAPL revenues were up by about 40% versus 2019 levels, driven by soaring iPhone, Mac, and services sales. Apple’s margins have also expanded considerably, with gross margins as of Q2 FY’22 standing at 43.7%, driven by a more favorable product mix, higher services sales, and rising volumes, up from around 38% in FY’19. However, investors are concerned about whether the momentum will hold up. The U.S. economy could be headed into a recession, as the Federal Reserve hikes interest rates at a more aggressive pace to tame surging inflation. The central bank just carried out a 0.75% hike last week, its highest since 1994, and more similar hikes are looking likely in the coming months. Consumer confidence is also on the decline, as surging energy, grocery, and housing prices eat into household budgets. Apple stock is already pricing in some of the economic pain, with the stock remaining down by about 28% year-to-date.
So how will a potential recession hurt Apple? Demand for consumer electronics companies is levered toward discretionary spending, which could decline if the economy takes a turn for the worse. Apple could see some pressure on its sales as people are likely to delay purchases of the company’s increasingly pricey products. Moreover, unlike the 2008 great recession which the company navigated with relative ease as the iPhone was just launched around then, Apple’s core smartphone market is increasingly saturated, with the company banking on price increases and its ecosystem effect to drive sales. That said, there are a couple of trends that could help Apple’s business perform better than its peers. Apple’s fast-growing services business is accounting for a greater mix of sales and profits and we expect this business to fare well even over a recession. Wireless carriers are also likely to support the sales of the iPhone, via discounts and promotions, as they look to bring more customers onto their 5G networks. Moreover, economic indicators do not point to a very deep recession this time around, with household savings rising post the pandemic and banks also remaining well-capitalized.
We think Apple stock remains a good value at its current market price of about $132 per share, trading at about 21x forward earnings. This is well below the 31x multiple seen in 2021 and 38x in 2020. Moreover, Apple’s solid balance sheet, with over $190 billion in cash, as well as its share repurchases, could enable to stock to hold up better than the broader Nasdaq index through a recession. We have a $179 per share valuation for Apple, which is almost 35% ahead of the current market price. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple. Also, see our analysis of Apple revenue for more details on the company’s key revenue streams and how they have been trending.
Stock prices have fallen precipitously across sectors over recent months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a market crash. We capture key trends in the Dow during and after major market crashes in our interactive dashboard analysis, ‘Market Crashes Compared.’