Why Apple could be hit by a recession
Apple (NASDAQ: AAPL) has long been a market darling, delivering huge gains to investors throughout its history. Shares of the iPhone maker have risen over the past decade, driven by the growth of its branded smartphone, a highly profitable service business and, more recently, a growing wearable segment.
However, like most consumer-oriented businesses, Apple faces a number of challenges related to the coronavirus pandemic. Its stores outside of Greater China have been closed for more than a month, consumers are stuck at home unable to shop anywhere other than online, and manufacturing in China has been temporarily suspended due to the outbreak .
The biggest risk for Apple right now may not be the pandemic itself, but the global recession that is just starting to sink. In the United States, 26 million Americans have filed for unemployment in the past five weeks, while Europe has been hit even harder. by the virus in terms of number of cases than the United States.
Apple has actually passed the S&P 500 since the start of the sale of the coronavirus, a sign that investors believe the company will only be modestly affected by the current headwinds, as investors anxiously await the planned deployment of 5G phones. However, this can be misguided. Although Apple is a technology company, it is consumer-centric and therefore sensitive to discretionary spending.
Bad news for consumer spending
Retail spending fell 8.7% in March, with much of the country shut down, and April is expected to be worse. While Apple’s online channel is still active, its own stores and the business partners it relies on love Best buy most of them have closed their stores.
Apple is also a high-end luxury brand, and while the company has managed to be both a mainstream brand and a premium brand, these types of brands are often the first to be hit in a recession. .
Apple-branded iPhones cost over $ 1,000 now, and refresh cycles were already lengthening before the onset of the recession. As more Americans and consumers around the world face unemployment and job insecurity, they are likely to just keep their old phones, delay buying a new phone, ‘Consider buying a used or refurbished phone, or buying a cheaper phone, instead of the newer one. flagship iPhone. Some might even ditch the iPhone in favor of an Android, which tends to offer cheaper options.
The iPhone was in its infancy during the last recession, so there is no easy way to know how the branded product will perform in tough times, but other durable and expensive goods can offer an analogue.
Cars, for example, have a number of similarities to iPhones. For most Americans these are necessities, but they are also big ticket items, and in tough times car sales tend to plummet. As you can see from the graph below, vehicle sales fell sharply during the last recession and took several years to return to their previous levels.
Similar sales of durable goods in general fell 12% in the last recession.
What this means for Apple
Looking at Apple’s performance in the financial crisis, we see a similar impact. In fiscal 2009, sales of Macs, Apple’s largest product at the time, declined 3%, following growth of 38% the year before. The following year, during the 2010 financial year, they recovered strongly, increasing by 26%. Apple’s overall revenue growth at the time did not diminish as it was supported by the emerging growth of the iPhone, but it still slowed sharply. Revenues for the three years of fiscal 2008-2010 increased by 52.5%, 14.4% and 52%, respectively.
Mac numbers and Apple’s overall revenue show a significant deceleration during the latest recession, which is a warning to Apple and iPhone sales. Its renowned smartphone is already a mature product, and iPhone sales actually fell 14% last year to $ 142.4 billion due to lower unit sales. IPhone sales rebounded in its first fiscal quarter, up 7.6% on a warm reception for the iPhone 11. However, given the headwinds of the pandemic and recession, sales should drop rapidly from the first quarter onwards and will likely end the year worse. than the 14% decline in 2019. A similar deceleration trend is likely with other Apple hardware, including iPads, Macs, and portable devices.
Despite the fact that Apple will face strong headwinds in the coming quarters, the stock is down less than 15% from its all-time high in February, and analysts are still calling for growth in prices. profits and income, although this may be because they haven’t updated their forecast yet.
With most consumer stocks crushed during the crisis, Apple could bring bad news when it releases its second quarter results on April 30. While the company will recover in the long term, investors appear to be underestimating the headwinds facing the tech giant. the next year or two.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.