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Investment Thesis
Although inflation is kept in check by the Fed, the real stakes of a full-scale war in Taiwan Strait can be a fuel for the rise in inflation which may hurt Apple’s global sales. In the meantime, the market value of Apple stock (NASDAQ:AAPL) appears to be relatively high and investors are highly either speculating on the market downturn or hedging against the downside risk in option markets.
An All-Out War In Taiwan Strait May Hurt Apple’s Production And Sales
The estimated EPS for Apple stock has been agreed to be higher for the next two quarters amid the rumored release of iPhone 14. It is expected to be 1.26 in the fourth quarter of 2022 and 2.12 in the first quarter of 2023. Indeed, the launch of the newest version of iPhone could generate more sales and revenue, yielding higher earnings per share. However, being overly optimistic about the prevailing market conditions is risky when the Russo-Ukrainian war is still raging and China is preparing to invade Taiwan as reported by The Washington Post and Zerohedge. Many major Apple’s suppliers are from China and Taiwan according to its annual supplier list. If China declares war on Taiwan, the global supply chain once again could be disrupted, and this time it could be worse than previous outbreaks.
This approximation may be too optimistic in the prevailing market conditions. (Seeking Alpha)
Other than that, inflation is at the highest level that has been seen in the last four decades as claimed by the CPI report. It can generally influence consumers’ behavior towards electronics when the purchasing power of their money has decreased over time. There would be no exception, and Apple’s products may face a decline in demand. People would carefully consider whether to buy expensive products rather than spending on necessities such as food and energy. It is because consumers often have an uneasy attitude of purchasing goods and services during a recession.
Inflation is at the highest level that has been seen in the last four decades. (U.S. Bureau of Labor Statistics)
More importantly, the major factor most significantly affecting the CPI calculation is energy, especially fuel oil, gasoline, and natural gas. This may increase the risk of higher inflation because if China goes to war in the Taiwan Strait, there will be another energy crisis. It was clear during the Russia-Ukraine war when the EU and UK decided to use Chinese gas and oil in response to Russia’s sanction program. Unfortunately, the China-Taiwan conflict has the potential to escalate into a war, exacerbating the energy crisis. This would raise energy prices and push CPI up as energy makes a huge contribution to CPI computation. Furthermore, rising energy prices have a negative impact on the logistics industry by potentially increasing shipping costs. All of these factors will raise commodity prices, reducing demand for Apple’s products even further.
The surging energy price in turn affects the logistics then Apple. (U.S. Bureau of Labor Statistics) Energy mostly contributes to the inflation. (U.S. Bureau of Labor Statistics)
A Strong US Dollar May Generate Lower Apple Sales In Foreign Countries.
A strong US Dollar has a global impact on the total consumption of Apple’s products as Europe and Asia regions annually generate more than a half of Apple total sales. According to Statista, the firm generated approximately 56%, 58%, 59% of total sales in these regions outside the United States in the fourth quarter of 2021, first and second quarter of 2022, respectively. A strong US Dollar will diminish the purchasing power of foreign currencies in American goods. In this case, a weak Chinese Yuan, Japanese Yen, and other Asian and EU currencies relative to USD could shrink the demand for Apple’s products in these markets.
A strong dollar can be harmful for the economy and the sales of Apple’s products outside of the US. (TradingView) The last three quarter revenues of Apple’s products by geographical region. (Created by Author using data from Statista)
The Market Value Of Apple Seems Relatively High
In terms of valuation, the AAPL stock has been evaluated relatively high as the price to book ratio achieves nearly 45.32. This value is extremely high in comparison to the growth rate when the return on equity is at around 28.08%. It simply indicates that the market value of Apple may be overestimated at the sensitive time when the entire market appears to be fragile. Additionally, AAPL’s beta is around 1.23 suggesting that this stock is more volatile to the prevailing market conditions and is systematically riskier than the whole market.
The valuation of AAPL stock is relatively high compared with its growth rate. (Seeking Alpha)
Option Markets Are Hedging On The Downside Risk
Regarding the volatility of AAPL stock options, the 30-day mean implied volatility, deprived from average calculation of put and call, draws a strong support at 0.21 throughout the last year. Meanwhile, the level of 0.28 is a strong support for 180-day mean implied volatility since December 2021. These lines can be seen as the released points for the one-month forward volatility at which the option stock prices seem to be not volatile. However, there would be a bounce back from here which will increase the forward-looking volatility for AAPL stock options.
The 30-day mean implied volatility may rebound from 0.21 and contribute more volatility. (Alphaquery) The 180-day mean implied volatility may rebound from 0.28 and contribute more volatility. (Alphaquery)
In particular, the 180-day implied volatility skew is the difference between the implied volatility of 180-day expiration options with lower and higher strike prices. Its value has remained relatively high and fluctuated around 0.05 since early 2022. It suggests that option traders are assigning more downside volatility to AAPL stock, indicating that many investors are highly either betting on the market downturn or hedging against the downside risk.
Investors are either betting on the market downturn or hedging against the downside risk. (Alphaquery)
The Bottom Line
Regarding technical analysis, the Apple stock has traded in the rising parallel channel since July 2021 and has broken through its lower band in April 2022. Recently, the price action has retested the rising channel while the SPX index and Nasdaq 100 indexes have retested their resistances. As a result, the price action is likely to fall if the range of $170 – $180 succeeds to hold the line as a resistance.
The price action is likely to fall if the range of $170 – $180 succeeds to hold the line as a resistance. (TradingView)
To summarize, while the Federal Reserve keeps inflation in check, the real risk of a full-fledged war between China and Taiwan, combined with a strong US dollar, could drive inflation even higher. This could change consumer perceptions of Apple products, causing demand to fall. When compared to its growth rate, the valuation of AAPL stock is relatively high in the current bad market conditions. Furthermore, AAPL may require another correction due to high Beta and increasing implied volatility, as well as option traders assigning more downside volatility. As a result, investors should carefully consider hedging against the potential downside risk.
