No Valuation Problem in Tech, CFRA's Zino Says

Key Concepts

Apple's international revenue exposure, tariff impact on Apple, potential responses to tariffs (price increases, margin hits), investor sentiment, semiconductor exposure to supply chain issues, hyperscaler CapEx spending, AI infrastructure buildout, technology market valuation compared to historical periods, free cash flow generation of big tech.

Apple's International Revenue and Tariff Impact

• International Exposure: Apple derives a significant portion of its revenue (57%) from outside the US. This makes it particularly vulnerable to international trade tensions. 43% of sales are in the US.
• China Production: The fact that most of Apple's iPhone production is in China is a key issue.
• Tariff Impact Calculation: The analysis estimates a potential $20 billion tariff hit for Apple based on the last 12 months of imports into the US.
• Offsetting Tariffs: Apple has options to offset the tariff impact, but a 30% across-the-board iPhone price increase in the US is deemed too disruptive to demand.
• Margin Hit: Apple may have to absorb a margin hit to mitigate the impact of tariffs.

Investor Sentiment and Stock Valuation

• Stock Correction: Apple's stock has already experienced a 30%+ correction.
• Downside Risk: The analysis suggests potential downside to $155-$165 per share, implying a 40% peak-to-trough decline.
• Historical Recovery: Apple has historically recovered from similar declines and reached new highs.
• Long-Term Perspective: Investors are advised to take a long-term perspective and consider the potential for Apple to adjust its business model.
• Potential Responses: Apple could increase iPhone prices by around $100 with the iPhone 17 cycle.

Semiconductor Exposure and Hyperscaler CapEx

• Semiconductor Sell-Off: The semiconductor sector has experienced a 40% decline from peak to trough, similar to the decline in 2022.
• Secular Opportunities: Despite the challenges, there are strong secular opportunities in the chip sector, particularly in AI.
• AI Infrastructure: The AI infrastructure buildout is expected to continue, although potentially at a slower pace due to tariffs.
• Nvidia's Position: Nvidia is highlighted as a key player in the AI infrastructure space.
• Hyperscaler CapEx: Hyperscaler CapEx spending is expected to be challenged in the near term, with a potential peak in the near term.
• Long-Term Growth Drivers: Cloud and digital ad spend are identified as long-term drivers of infrastructure spending.
• 2026 CapEx Increase: A 4% CapEx increase for hyperscalers on a combined basis is expected in 2026, compared to a 30%+ increase this year.

Technology Market Valuation and Free Cash Flow

• Valuation Comparison: The current technology market is considered to not have a valuation problem compared to historical periods like 1998, 2000, and 2008.
• Big Tech Drivers: Big tech companies with massive free cash flow generation are driving the market.
• Apple's Free Cash Flow: Even with a $20 billion tariff hit, Apple is projected to generate potentially $90 billion in free cash flow on an annualized basis.
• Valuation Discount: Broader tech is trading at a 20% discount, trading less than 20 times on a calendar 26 basis.
• Long-Term Opportunity: Long-term investors may find opportunities in the technology market, but should be prepared for near-term volatility.

Conclusion

The technology market is facing challenges related to international trade tensions and potential slowdowns in hyperscaler CapEx spending. However, the sector is supported by strong secular trends, particularly in AI, and the massive free cash flow generation of big tech companies. While near-term volatility is expected, long-term investors may find opportunities in the current market environment. Apple, despite facing tariff headwinds, is expected to remain a strong player due to its ability to adjust its business model and its significant free cash flow.