Maxim's Tom Forte talks why he thinks Apple is 'dead money'

Time is Apple dead money? That’s the question posed by Maxim Group in a new note initiating the stock at hold. Apple’s down 4% so far this week. It’s sharply lagging the Dow this year. Joining us now is the analyst behind that note, Tom Forte. Tom, it’s good to have you on and we’re going to start right there. Why do you think Apple’s dead money? Or why do you think I should say it continues to be dead money? So when you look at Apple, it has three real challenges that could result in the shares being dead money #1. They’re significantly overweight to China. About 20% of the revenue comes with China from China. Rather, their supply chain is still heavily dependent on China #2. They’re overweight essentially 1 product, the smartphone. More than 50% of the revenue came from iPhones #3. If you look ahead, you’re looking at about flat revenue growth for a stock with a 25 PE. So if flat revenue growth is flat earnings growth, your peg ratios like 25 to 1. So how are you going to maintain that kind of multiple on flat growth? And then how do you overcome the overweight to China when the Chinese economy is weak And then how do you overcome an over reliance on a product. They first released the iPhone in 2007, so we’re 17 years in the product cycle. So I think those factors really could contribute to potentially a period of Apple being dead money for a long period of time. OK. How are you gauging the Worldwide Developers Conference though? We know that’s coming up here in a couple of months. Apple’s really sort of the last big mega cap name that hasn’t outlined some sort of AI strategy and there is this growing expectation that maybe you get more of that there. OK. So on a near term basis, I think AI can be wonderful if you’re selling chips like NVIDIA or if you’re hyperscale cloud company like Microsoft or Google or Amazon. But for other companies including Apple, I don’t know if you’re going to see an immediate lift to sales and profits from artificial intelligence. Now, we know they’re not going forward with electronic vehicles, which would have self driving features that would leverage AI. Other speculation, they’re going to go with robots, but I don’t know if robots are going to move the needle for Apple from a revenue and profitability standpoint. And I don’t know that they’re going to do that for a long time. So yes, we’re looking forward to whatever they have to say, especially about generative AI at the developers Conference. But I don’t think it’s going to save shares of Apple over the next 12 months. Tom, let me play Apple’s advocate here since you’ve laid out your case so thoroughly. Yeah, Apple is overweight iPhone, but it happens to be overweight the most dominant consumer product of our lifetime. They’ve managed to maintain very impressive margins despite competition from some of the biggest companies in the industry over that period of time. And right now not only are they at a point where the the China headlines are arguably at their worst, but they’re being underestimated in AI. What do you say to that? OK, so I would say that if you wanted to be more optimistic than I am on smartphones, you would look at the device behind me being the television and say that the product life cycle for televisions has been multiple decades. So I do think that what could save shares of Apple is if 10 years from now we’re still talking about smartphones as the dominant way that consumers interact with the Internet. But I think it’s unclear at this point in time. And do you want to pay 25 times earnings for a company when the best days are clearly behind it for its most important product? Well, people have been arguing that Apple’s best days are behind it for about 15 years now, and yet for most of that time the stock has continued going up. I would also push back on you saying that so many companies right now are moving toward vertical integration. You’ve got your hyperscalers trying to do chips, etc, When that’s been Apple’s playbook for a long time and they already have homegrown chip design heading into the AI era. So doesn’t that potentially lead to some performance advantages for them? The disconnect for Apple today is this. So if you look at the March quarter, you’re projecting the hardware. We’re projecting the hardware to decline at a double digit rate. So what’s driven Apple shares over the last cycle is the emergence of higher margin services revenue. But if you have a declining hardware base of double digits, can you overcome that with higher margin services revenue to drive or maintain the premium multiple? Yes, there’s a lot of advantages for Apple. Yes, historically they found that next big thing. We know the next big thing’s not electronic vehicles. It isn’t clear to me what it is, but it isn’t clear to me that 25 times PE is the right amount to pay for the stock today.