January 15, 2023 - 2:09am EST by
2023 2024
Price: 134.80 EPS 6.178 6.742
Shares Out. (in M): 16,356 P/E 21.81 19.99
Market Cap (in $M): 2,134K P/FCF 0 0
Net Debt (in $M): -36,629 EBIT 0 0
TEV (in $M): 2,097K TEV/EBIT 0 0
Borrow Cost: Available 0-15% cost

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Time to repost AAPL. I will try to keep this short but add some extra color since Mip14 wrote a good report in Aug/2020, that was unfortunately too early due to the massive market distortions created by covid, but its definitely playing out now.

AAPL still presents one of the best short opportunities for 2023. It’s still being valued over $2T just as we are about to start printing negative real GDP growth rates. Probably the best pair trade of 2023 is Long META / Short AAPL (which we are), but we also like AAPL short with our SPOT long in the sense that one’s headwinds are another’s tailwinds.

AAPL stock is down -25% from its highs but still +83% higher than pre-covid. There is $16 billion in nominal dollars being short AAPL atm, which seems high but that’s only 0.8% of the float. Mip14 said this but I will say it again! You can make a very big position in nominal value with very little risk to the upside. In other words, this is a short you can sleep well at night.


Key bearish points:

  1. Going from a massive pull forward in product sales into a recession year, while sell still think they can grow sales and EPS.
  2. Earnings multiple are still near the highest it’s ever been (relative to the S&P). AAPL’s forward p/e is 20% above S&P500 and this premium is 33% higher than 2019, despite the outlook being significant worst Today with multiple risks on the forseable future.
  3. Taiwan risk is not priced in at all.
  4. Digital Market Act (“DMA”) starting in 2024 in EU. Will the US follow? This won't impact EPS initially but the market will start pricing the US to follow, where the impact would be massive!
  5. DOJ/Google lawsuite can be a major headwind to 2024.


If we take a step back and think high-level for a second, AAPL had a record year in iPhone sales in 2018 and when they said they would stop report iPhone unit sales, the market saw that as a major red flag. Stock went on to decline 30% as a result.  However, the market quickly pivoted the attention to the Service Revenue line due to exciting software-like margins and the potential growth ahead by adding more and more ancillary services to the iPhone install base. As a result, AAPL stock almost double in the following 12 months throughout 2019, growing +86%. We are talking about a ~$600 billion in market cap appreciation. The company went from $700bn to $1.3T in just one year, which was driven entirely by a multiple expansion. 

If that wasn't impressive enough, the company went on to grow into nearly $3 Trillion in Market Cap during Covid. Even after some pull back, AAPL is still being valued at $2T (that's $1.3T in higher value vs 2018 – you could buy GOOG and META with this additional value - 2 much higher margin businesses). Think about this! What has truly changed with Apple as a company that it should deserve a $2T valuation Today vs $700m just 4 years ago? What?! Will you tell me that their shitty services revenues should be worth ~$1 trillion? This is no AWS, Azure or GCP which are incredible businesses with true recurring revenues. Apple's service revenues are built on monopolistic behavior that we think will eventually fade away. It won't be without a fight, but every tech company in the world has a mobile app now and they would all be incentivized to unify against Apple. Those things take time and it shouldn't surprise anyone that Fortnite ended up losing to Apple, but that was a key first eye opener to regulators and the entire market as to how insane it is to charge 30% on the top-line of app developer's revenues. Apple decreased to 15% their take rate for apps with up to $1m in annual sales and made some exceptions such as to news apps, but we think this is just the beginning. The argument that Apple needs to charge something as they have costs related to keeping the app store security is valid, but they don't need to spend $20 billion to keep those apps safe from malware. So it really puzzles me when investors think highly of Apple's service revenue line. iCloud is just a database to store your mobile photos. Apple Music is ok, but it can’t move the needle (too small). Same for Apple Care. Apple TV+ sucks and loses money. So there is really only 2 things that really matter à (1) their abusive App Store tax on app developers and (2) Google license deal.  These 2 are 80% of the total service gross profit Today, and its been also responsible for most of the incremental gross profit dollars over the years. Any Apple shareholder should really ask yourself this one question: Do I think that Apple’s ability to grow App Store revenues and take more money from Google is higher or lower in the next 5 years vs the last 5? So why should you pay a higher multiple Today vs before?

Even if you believe in consensus ’23 EPS, Apple’s multiple is currently 45% higher than 2018 (before re-rating in 2019), or 60% higher when measuring relative to the S&P500, as Apple used to trade below S&P’s multiple. And if we measure against 2019 (after the company nearly doubled in size driven by the multiple re-rate), AAPL currently trades 33% higher Today vs 2019 in both  measures, relative to S&P500 and relative to itself. 



This is a good chart from a Bernstein note to illustrate how much Google has been paying Apple over the years. Essentially 50% of the incremental service revenue gross profit over the last 7 years came from Google.

Chart, bar chart

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 Below are some information about these regulatory headwinds.


Google Antitrust lawsuit

It was filed by the United States Department of Justice in October 2020, accusing Google of engaging in anti-competitive behavior in the online search and advertising markets. As the chart above shows, the amount Google has been paying Apple has significantly increased. In the headline articles on this topic, the amount mentioned was $10 billion, reflecting 2019/2020 numbers. But since that number has doubled, and that  goes entirely to pre-tax earnings, equating to ~17% of total company pre-tax earnings, this is a significant risk. It is difficult to estimate the outcome on these lawsuits and more recently there’s been news that Google is arguing that they don’t block other companies from bidding. I’m no lawyer but I’d imagine that’s an easy argument to counter. Which company could outbid Google? Only Microsoft could, but if the regulators really want a fair bidding process, it could estipulate a cap that would be affordable to smaller players such as DuckDuckGo and Yahoo! Some analysts think the outcome can be Apple allowing 3-4 search engines available to the user’s choice, where each company would have to still pay apple some fees to become an option for the user. We doubt the sum of those payments would equate to $20 billion.

According to statcount, here is the mobile search market share breakdown by company within the US market.

Graphical user interface

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This lawsuit can take a while for it come to a conclusion. I believe a trial hearing is currently set for September 2023. 


Digital Market Act (“DMA”)

This is a piece of European legislation that was proposed in Dec 2020 and signed into law in Sep 2022 by the EU parliament and Council of the EU. They will classify some companies as “Gatekeepers”, and those will have to obey new rules. Here are some of the new rules:

    1. Gatekeepers cannot rank their own products or services higher than those of others.
    2. Gatekeepers cannot pre-install certain apps or software, or prevent users from easily un-installing these apps or software.
    3. Gatekeepers have to allow competing 3rd party app stores to be available, thus allowing the users to download apps from a different app store.
    4. Gatekeepers have to allow app developers to use 3rd party payment system within apps.
    5. A ban on tracking end users outside of the gatekeepers’ core platform service for the purpose of targeted advertising without obtaining appropriate consent.
    6. A ban on using the data of a business user if the gatekeeper competes with the business user on the gatekeeper’s own platform.

The European Commission will announce the companies being classified as “gatekeepers” by May/2023 and those will have ~6 months to comply with the new rules by ~Nov/2023. App Store is 12% of total Apple’s gross profit and EU is ~1/4 of total company’s revenues. This legislation can only initially affect 3% of AAPL’s total gross profit, so it’s not a big hit at first, but the bigger issue is the market will begin to incorporate the potential outcomes of the US adopting similar actions. The US currently have several proposed regulations against big tech, 2 of those that are similar to DMA are the American Innovation and Choice Online Act (AICOA) and the Open App Markets Act, both introduced in 2021 and both seems to have strong bipartisan support.


Taiwan Risk

Here is a wild card risk that is not being priced at all.  If China were to invade Taiwan, it’s likely that TSMC would have to halt production causing a major disruption to the global semiconductor industry and especially to Apple's supply chain, which relies almost entirely in TSMC for their Series-A chips used in the iPhones. TSMC is building an Arizona chip factory and is expected to be up and running in ~2024/2025. This factory is reportedly to have only have 5nm initially. Apple’s latest A16 Bionic is built using 5nm, but by 2024/2025 we think the company will definitely want to move to the 3nm and TSMC might be at 2nm by then. If Taiwan were to move their latest technology to the US, there is arguably a much lower reason for the US Government to go into war against china to protect Taiwan. It’s foolish of us to even try to predict what can happen in such scenario, but the important thing to note is that this is not a 0% risk and is not being priced at all in a 20x pe.  


At the end of the day, this is still about iPhone and Product Sales

Ultimately, what will drive earnings in the foreseeable future are still Product Sales (NOT Service Revenues). For the last 3 years ending in 2018, Apple CAGR -2% in iPhone units sold and then they stopped reporting it. We believe they sold -15% less iPhones in 2019 vs 2018. Since covid started, we estimate iPhone units shipped CAGR +9% from 2019 to 2022 and that Product Sales CAGR +14% over the same period (vs +3.8% in 2016-2019). That’s a massive pull forward in demand. I don’t need to go over the dynamics of covid, we all know what happened with extra savings, working from home, thus buying new Macbooks/iPhones/wearables etc…

What is interesting is that Product Sales is still 80% of total sales and that’s only 2pts below 2019. In terms of gross profit, Product is actually the same exact 70% Today vs 2019, as products margins have expanded. When we talk to Apple bulls they agree consensus is too high when estimating +9% service growth and flat product sales in 2023, but even if you hear their estimates (ie. -2% decline in product sales, LSD service growth) we think those are also too high.

What’s really excited about Apple’s outlook? They will have a pretty big correction year, followed by EU regulations starting in 2024 and with potential similar US regulations to follow soon after. There is also the DOJ/Google overhand. Lastly but not least, the Taiwan risk that should only grow over time. Behavioral finance psychology will come into play soon. Just as the pendulum swings to both sides, and it has swung to the positive side over the last 3 years, it is now time to swing to the negative side. When product sales start to disappoint in 2023, and we think they can end up disappointing in a rather meaningful way, this general will start to fall! There is no explanation for Apple to earn a 20x multiple in this environment with so much risk on the horizon. 

Valuation is simple: AAPL will generate less than $6 in EPS in 2023 and 2024 and as more negative news comes from regulation (ie. DMA selecting Apple as a "gatekeeper" in May) and more public scrutiny on their monopolistic behavior, combined with disappointing product sales, we think will cause the market to revise AAPL's current multiple. Pick any EPS number below $6 with a multiple you think it deserves in recession year that's your price target. 

Here is one simplistic way to look at this, starting from 2022 as a baseline. Assuming product sales decline -12% in '23 and -4% in '24 and service revenues flat in '23 and up +4% in '24. 

Why would service revs be flat in '23? 70% of app store revs comes from game apps, we think those will earn less vs last 2 years. Google likely not going to increase payments to AAPL as they may earn less ad revs, and Apple's own advertising business likely to contract or not grow. All-in, we see very little chance for growth in 2023 and 2024 we there is some headwinds from EU that will affect some of the service gross profit. Product sales should decline in the next 2 years (not just 1 year) as this iphone recyling period was much stronger (+40% in '21 and +7% in '22), and unprecedented sales from literally every other product (apple watch and airpods doubling in sales and macs and ipads also growing ~+30-50% vs pre-covid). 

Are my numbers too low? Possibly, but who's going to buy iPhones/macs/ipads this year? What's the upside for this stock? 

You can short the hell of it and just wait to see how they will disappoint whatever the street is estimating. Multiple compression may not happen, or may happen much more significantly than what this table assumes. 


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


- missing street estimates in 2023 

- DMA designating Apple as a "gatekeeper" (May/2023)

- more negative antitrust and regulatory news

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