Earnings opportunity: Can Apple and Tesla bounce back?

The ‘Magnificent Seven’ stocks of Apple Inc., Amazon.com Inc., Alphabet Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc. are driving overall stock-market returns year to date in 2024. Yet, within this group, leadership has become increasingly concentrated. Shares of Amazon, Meta, Microsoft, and Nvidia have done most of the heavy lifting. These four stocks have contributed nearly 75% of the S&P 500’s total return this year, more than double the contributions from the top four stocks during this time last year.

Concentration risk is elevated due to this narrow leadership and it’s a problem not to be ignored. This is stemming AI-powered gains and has raised warning bells for some investors, as the market’s concentration has surpassed levels seen in the dot-com bubble. The 'Magnificent Seven' now make up more than 29% of the S&P 500, surpassing the 21% share the top seven stocks held in the 1999 and 2000 period. Considering Tesla which is no longer one of the top 10 largest stocks in the S&P 500, the concentration of the top 7 today is above 30%. This is a dramatic increase from the 14% concentration seen a decade ago. Here is a look at the top two laggards in the group and the potential opportunities they present to investors.

Apple

Apple has the world's most valuable technology platform with over 1.2B users. While Apple is exposed to a weaker consumer and competitive risks in China, these factors are well understood, and with the potential for Apple's long-term outlook remaining attractive given its technology leadership, sticky user base, and long runway to spend per user upside.

TECHNICAL INSIGHTS

Apple has to penetrate and hold the resistance pivot point around the $176.40 for an upward reversal to potentially retest this year’s high around $196. The alternative scenario is price breaks below the $164.940 pivot with a potential continuation to the Support at $156.50.

Moreover, Apple is trading below both its 50-day EMA at 174.654 and 20-day EMA currently at 170.530 with the 50-day EMA holding as a resistance to price penetration. The RSI is at 35.78% trending towards oversold levels with the MACDbelow its signal line, and negative. There is a probability the stock could continue is near term uptrend.

Aggregate Analyst Consensus: Apple has a cumulative consensus BUY recommendation with a Price Target of $199.97 based on 41 Analyst Ratings.

BULL BASE BEAR SCENARIOS

Bull Case $270 – Implies 34x Bull FY25 EPS of $7.99

(current 12-month options market price view: prob > PT appx 2.33%)

iPhone replacement cycles accelerate in FY25 as AI iPhone drives mid-to-high teens revenue/EPS growth. Consumer demand returns, and stronger than expected iPhone 16 upgrade intentions + mix shift to higher end iPhones drives 20%+ Y/Y iPhone revenue growth. Total revenue reaches $551B in FY25, while EPS reaches $7.99. We shift to a lifetime value-based valuation, which gives Apple credit for the shift towards subscription. Our bull case valuation implies a 34x P/E multiple on FY25 estimates.

Base Case $220 – 7.5x EV/Sales FY25 or 30x FY25 P/E

(current 12-month options market price view: prob > PT appx 18.46%)

Revenue is flat Y/Y in FY24, but Services and margins remain resilient, and investors look past near-term to Edge AI opportunity in 2025. Flat revenue is due to Servicesgrowth offset by Product declines. 45%+ GM through FY24 surprise to the upside, driven by mix and FX/inflationary headwinds fading. Investors turn their attention to FY25 & the impact from a potential AI iPhone launch, which alongside services growth, and $80B of annual buybacks, can reaccelerate fundamentals.

Bear Case $155 – 5.8x EV/FY25e Sales; 23.7x FY25 Bear EPS of $6.54

(current 12-month options market price view: prob > PT appx 25.99%)

iPhone 15 cycle continues to disappoint as consumer spending weakens more than expected while competition stays intense. Growth slows even further across the portfolio as discretionary income is pressured by hard landing, causing a weaker than expected year of Product spending to lead to HSD Y/Y revenue declines in FY24. Services also decelerates to MSD. With revenue flat, slight gross margin expansion drives LSD EPS growth, or ~$6.54 in FY25. Our bear case valuation implies a 24x FY25 P/E.

CATALYST TO UPSIDE

Positive estimates revisions from Product and/or Services strength, gross margins outperform expectations, iPhone 15 cycle surprises positively from demand deferral and share gains. As well as shift to a hardware subscription model, AR/VR headset and other launches scale more quickly, emerging market penetration surprises positively and an underappreciated 'Edge AI'.

CATALYST TO DOWNSIDE

Weaker global consumer spending, greater competition in key markets, increased regulation particularly around App Store and focus on nearshoring production weighs on margins.

Tesla

Tesla’s weak last quarter update is a clear sign of the ongoing EV ‘shake-out’ phase. Tesla has significant attributes to be valued as an AI beneficiary, but the company must see a stabilisation in the negative earnings revisions within the auto business first.

Despite overwhelmingly bearish sentiment from institutional investors, Tesla's appeal lies in being both an automotive stock and a leader in energy and AI/robotics. Negative developments in the global EV market very much matter to Tesla and should reasonably have a negative near-term impact on the price of the stock. At the same time, however, investors should not ignore the continued developments of Tesla’s other plays, many of which are auto related (i.e. the recurring revenue opportunity from the Tesla fleet and Robotaxi service), Dojo and other areas which we expect to learn much more about during the upcoming 2024 Tesla AI Day.