Shares of iPhone maker Apple Inc. (AAPL, Financial) have been steadily climbing higher since bottoming out back in January 2023. While the relief rally has run out of traction, with shares now commanding a price-earnings ratio of 26.26 (still a tad higher than that of historical averages), Apple stock still seems richly valued and ripe for a pullback. However, just because Apple stock's price multiples are high does not necessarily mean it's overvalued. There's a lot that goes into Mr. Market's pricing of a particular stock.
Recently, the failure of Silicon Valley Bank (SIVB, Financial) and ongoing interest rate hikes have curbed investor appetite for high-tech innovators. Like the many startup innovators that use Silicon Valley Bank, Apple is highly innovative. Apple is also rich with cash, unlike many of its relatively tiny peers in Silicon Valley. The company has more than enough cash to take risks in the development of nascent technologies, even as rates rise and investors reward cost cuts and budget trims over continued investment in "exciting" areas. The ability to take and manage risk is vital for innovation to thrive. In that regard, Apple stands apart from so many in the industry.
The days of betting big on unprofitable high-tech innovators with no regard for valuation or profitability potential have come and gone. But for Apple, I do think many folks are discounting the company's ability to accelerate innovation at a time when almost every firm in tech is ready to trim costs at the expense of innovation.
Apple trims its budget as many tech peers axe theirs
Undoubtedly, Apple's enviable balance sheet will allow it to keep innovation alive and well in a market that wants more budget cuts. On Tuesday, Meta Platforms (META, Financial) skyrocketed more than 7% on news of another 10,000 layoffs. Blame the economic climate, if you will, but Apple is a company that hasn't followed in the footsteps of its tech peers who've engaged in mass layoffs.
Apple may not be making headlines for big-scale layoffs. However, it has been more cautious with regard to how it spends. With a profoundly healthy balance sheet, Apple could easily keep its foot on the gas. Regardless, Apple does have an opportunity to improve upon its efficiencies while continuing to "floor it" with its biggest, brightest and best innovations.
Reportedly, Apple is delaying bonuses and limiting hiring. Unlike many tech innovators, Apple didn't go on the same hiring spree during the pandemic. Indeed, CEO Tim Cook, who recently took a voluntary pay cut to help the company manage costs, deserves applause for his management through a euphoric time for tech.
To quote Warren Buffett (Trades, Portfolio), "Only when the tide goes out do you discover who's been swimming naked." In a way, Apple is one of the tech giants that was always swimming with its trunks on.
New products on the horizon could give lift to Apple's profits
Economic headwinds or not, Apple's capital allocation is among the best out there. Even as Apple becomes more "deliberate" with its spending, don't count on any budget cuts to take away from the progress of the company's innovative product pipeline. Indeed, it's been a while since Apple launched a "revolutionary" product. With reports of a mixed-reality headset readying for launch this year, 2023 may be the year when Apple stock ascends to new heights on the back of new products, with or without the S&P 500.
Indeed, the launch of a mixed-reality headset has likely been partially baked into shares already. However, I think there's a good chance that Apple's unveiling excites us more than we expect. Indeed, the first Apple Watch unveiling wasn't a needle mover the iPhone was. However, a headset seems like it could be a bigger needle mover than the Apple Watch or iPad. At this juncture, it's unrealistic to think a headset could rival the hype of the first iPhone unveiling. Regardless, I don't doubt that Apple's headset launch will make a lot of noise.
Right now, Meta Platforms is the king of the virtual-reality headset market. It's not quite a "must-have" consumer product for most people. Only time will tell if Apple has the headset that people "need" to have. Given Apple's reluctance to launch products "too soon," I do think its headset could be a heck of a lot more successful than most people think as it looks to put the finishing touches on its new operating system (will it be called something like xrOS or realityOS?).
For now, Apple seems ready to go with the unveiling of the headset at this year's WWDC (Worldwide Developers Conference). However, I wouldn't rule out further launch delays, given a recent report from the Financial Times that shed light on objections by the design team.
Final thoughts on Apple
Apple stock seems a tad on the pricy side. But with a new headset launch getting closer by the day, I do think shares are capable of further multiple expansion from here. Investment firm Evercore also believes the stock is very much deserving of its premium. Further, Apple's strong balance sheet and long-term focus could continue to help it swim forward as other tech companies sink.
