What a recession would mean for Apple Stock

Apple’s financial performance has been strong over the past two years, driven by growing demand for computing devices as the trend towards remote working and learning accelerated during the pandemic. For perspective, in FY’21, Apple
AAPL
revenue was up around 40% from 2019 levels, driven by surging sales of iPhones, Macs and services. Apple’s margins also increased significantly, with FY22 second-quarter gross margins of 43.7%, driven by a more favorable product mix, higher services sales and growing volumes. up from around 38% in fiscal 2019. However, investors are worried about whether the momentum will continue. The US economy could be heading into a recession as the Federal Reserve raises interest rates at a more aggressive pace to rein in rising inflation. The central bank just hiked 0.75% last week, its highest level since 1994, and more similar hikes are likely in the coming months. Consumer confidence is also down as soaring prices for energy, groceries and real estate eat away at household budgets. Apple stock is already pricing in some of the economic pain, with the stock remaining down around 28% year-to-date.

So how will a potential recession affect Apple? Demand for consumer electronics companies is driven by discretionary spending, which could decline if the economy deteriorates. Apple could see some pressure on its sales as people are likely to delay purchases of the company’s increasingly expensive products. Also, unlike the Great Recession of 2008 in which the company navigated with relative ease when the iPhone was just launched at that time, Apple’s core smartphone market is increasingly saturated, the company leveraging price increases and its ecosystem effect to drive sales. That said, there are a few trends that could help Apple’s business perform better than its peers. Apple’s fast-growing services business represents a greater combination of sales and earnings and we expect this business to do well even in a recession. Wireless carriers are also likely to support iPhone sales, through discounts and promotions, as they seek to attract more customers to their 5G networks. Moreover, economic indicators do not point to a very deep recession this time around, with household savings increasing after the pandemic and banks also remaining well capitalized.

We think Apple stock remains a good value at its current market price of around $132 per share, trading at around 21 times forward earnings. That’s well below the 31x multiple seen in 2021 and 38x in 2020. Additionally, Apple’s strong balance sheet, with over $190 billion in cash, along with its stock buybacks, could allow stocks held up better than the broader Nasdaq index through a recession. We have a valuation of $179 per share for Apple, nearly 35% ahead of the current market price. See our analysis on Apple rating: Are AAPL shares expensive or cheap? for a look at what drives our price estimate for Apple. See also our analysis of Apple revenue for more details on the company’s main sources of revenue and their evolution.

Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’

What if you were looking for a more balanced portfolio instead? Our quality portfolio and multi-strategy portfolio have consistently beaten the market since the end of 2016.

Invest with Trefis Wallets that beat the market

See everything Trefis Price estimates