Why $AAPL Is An Overvalued Company in Decline

While everyone is focused on GME, BBBY, AMC, or whatever else is being pump and dumped on you guys on a weekly basis, I think one meme stock is flying under the radar: Apple. Unlike the three stocks I mentioned above, Apple actually has positive earnings on a yearly basis. However, Apple’s valuation has gone past the point of insanity to the point of mass delusion.

A lot of people treat Apple like it’s the same company it was in 2018. At the end of 2018, Apple was trading at:

P/E (Price to Earnings): 12.5

P/S (Price to Sales): 2.9

P/B (Price to Book): 6.1

P/FCF (Price to Free Cash Flow): 11.9

D/E (Debt to Equity): .8

Cash + current marketable securities: $86.4B

Long term debt: $93B

TTM (Trailing 12 month) Revenue: $261.6B

TTM Earnings: $59.4B

Currently, even after a 7-8% drop from the recent high, Apple is valued at:

P/E: 27 (+116% since 2018)

P/S: 7 (+141% since 2018)

P/B: 45.3 (+643% since 2018)

P/FCF: 25 (+110% since 2018)

D/E: 1.6 (+100% since 2018)

Cash + current marketable securities: $48.2B (-44% since 2018)

Long term debt: $94.7B (+1.8% since 2018)

TTM Revenue: $387.5B (+48% since 2018)

TTM Earnings: $99.6B (+68% since 2018)

In their last earnings report, their revenue was only up 1.87% year over year, while earnings were down 10.6% in that same time period. This is a company that is in decline, yet their valuation multiples have greatly expanded, cash has decreased, and debt has greatly increased as well. On top of all this, because they bought corporate bonds and treasuries at the top (around $200B worth), as rates have gone up, they now have $9.3B in unrealized losses on their portfolio, something that would make anyone reading this jealous. If rates keep going higher, and the Fed has given us no indication of a pivot, the losses will continue to grow.

Apple has burned through 44% of their cash since 2018, but their long term debt level has stayed the same. Their debt to equity has doubled in that same time period. Debt to equity going higher is kind of like increasing the margin utilization in your portfolio. It works well on the way up, but on the way down, these types of debt levels can really weigh down on their business.

The reason for this increase in debt? Buybacks. As of the end of last year, Apple has dumped $274.5Binto share buybacks since 2012. Taking into account their buybacks from the last two quarters ($62B and $65B respectively), that number explodes to $401.5B in share buybacks since 2012.

Apple raised their prices in Japan by up to 25% and immediately saw a revenue drop of 17.4% in that region. With the way that the dollar is appreciating compared to the yuan, it is inevitable that Apple will raise prices in China as well. With the Fed tightening while the PBOC continues loosening, there is no end in sight for the devaluation of the yuan. China made up 17.6% of Apple’s revenue in the last quarter. If the Chinese revenue has a significant decrease, which is looking likely due to their economic troubles, Apple’s revenue and earnings will drop even more.

Everyone thinks Apple is a strong company but if you look below the surface, the situation isn’t as strong as anyone thinks. Their future products and revenue streams show a sense of desperation to me. They apparently have a VR/AR headset being announced allegedly in January 2023. Sounds great, but it’s expected to be over $2,000, with a cheaper one not coming out for years after. I can’t see them selling a lot of $2,000 niche products while heading into a recession.

Another product they allegedly have coming is the Apple Car. This thing is faker than the Cybertruck. First of all, they’ve been working on it since 2014 and they still have nothing to show for it. Now the rumor is that they’re gonna launch it in 2025 with no steering wheel or brake pedals. The car is reportedly “mocked” throughout Apple and the team is having issues with their software.

Apple is also bringing financing in house for their buy now pay later service. According to CNBC, 42% of buy now pay later customers made late payments. As the economic situation deteriorates, it’s hard to see Apple collecting on all of the money they lend out. That’s a pretty big risk for a company that’s been bleeding cash.

And finally, Apple is focusing on ad revenue. Apple is going to start putting ads in the Maps app. One of Apple’s main advantages with their software is the fact that they don’t show ads. When this changes, Apple’s software loses one of its main advantages of its competitors. An analyst estimates that Apple’s ad revenue will hit $6B by 2025. With both Google and Meta ad revenue in decline currently, it’s hard to see how Apple will get a bigger seat at the table in a currently declining market. This analyst also values Apple at a ridiculous 30 P/E ratio so he’s full of bad takes.

As Apple’s earnings continue to decrease, my thesis is that they will need to stop their buyback to deleverage and stabilize their balance sheet. This would stop a main source of buying pressure and cause the stock to drop. The stock would drop even more if Warren Buffett stops trying to YOLO on momentum stocks and remembers he's a value investor too, but 40% of Berkshire is in Apple.

If they don’t halt or decrease their buyback, they’ll have to continue going into debt until that debt load crushes them. Either way, the outlook for the stock in the medium to long term is not bullish. Eventually, the fundamentals will matter again.

tl;dr: Apple is a declining company that is desperate for new products. Their valuation multiples have increased significantly faster than their revenue/earnings while their debt has gone up in relation to equity. Their earnings decreased 10.6% year over year last quarter and no one is talking about it. This thing is going to come down eventually, the only question is when.