The article analyzes the reasons behind Apple's recent stock decline and the fading hype surrounding GLP-1 drugs. It explores the impact of a potential tariff exemption for iPhones, legal issues with Google payments, and concerns over growing competition in the pharmaceutical sector.
Good morning. Here is how much the market discounts what the new president says: speaking at Davos, Donald Trump said he would demand that interest rates drop immediately. Later in the day, he said he planned to talk to the chair of the Federal Reserve about it. If any other president in the past 40 years said that, the bond market would have had kittens, and it would be the biggest story in the world. But the market did nothing, and the story didn’t make a homepage. Literally no one cares.
Email us: [email protected] and [email protected]. Also, for UK readers: the FT’s annual bonus survey is open for entries. It’s anonymous; it’s not just for bankers; takes three minutes to complete; and the findings will be written up in the FT. This year, the FT is asking folks about how pay policies have shifted following the removal of the banker bonus cap, which will mean much bigger bonuses for some, but lower base pay for many others. Click here to take the survey. Yesterday we presented a tidy theory of the Magnificent Seven’s underperformance in the past month or so. Considered as an asset class, the seven are the new defensives stocks — companies with great brands that can grow even in a slowing economy. But the market at the moment, far from playing defence, wants exposure to economic growth through cyclical stocks. There’s a little problem, though: most of the decline in the seven comes down to one company. Apple is down 14 per cent since Christmas. Tesla is down 11 per cent, but is only a third of Apple’s weight in the S&P 500. The rest of the seven are meandering along, a bit above (Nvidia) or below (Alphabet) the performance of US big caps, generally. We could repurpose our argument to be just about Apple, which very clearly is a defensive stock, rather than all the Magnificents. But there are specific things going on with the company that explain its even steeper decline. In April of last year, after another bout of underperformance from the iPhone maker, we wrote a piece called “What’s wrong with Apple?” We considered six explanations: We were not too impressed with any of those arguments then. Our instincts turned out to be good: the stock rose 50 per cent from when we wrote the piece to the end of the year. But now, all six worries have gotten worse. Even after the recent sell-off, the stock’s price/earnings valuation is a third higher than it was back in April. The sales growth and AI issues have come together: consumers have not demonstrated wild enthusiasm for AI-enabled phones in general, and the perception that Apple is lagging behind Android on that tech has grown. This casts doubt on the idea that AI will drive a big iPhone upgrade cycle. As Craig Moffett of MoffettNathanson research sums up: The weakness of defensives we discussed yesterday. An ascendant and aggressive Trump increases the odds that Apple will not get a tariff exemption for iPhones (Edison Lee of Jefferies estimates 90 per cent of which are made in China), and makes it more likely that Chinese consumers will become more hostile to the company’s products. The legal issues are perhaps the most acute risk. The judge in the Google search antitrust case has ruled the company’s payments to Apple for search traffic are illegal. These payments amount to perhaps $16bn or more a year, more than 10 per cent of Apple’s operating earnings in the US. CFRA Research’s Nicholas Rodelli put 60 per cent odds on the legal remedy cutting the payments by at least half. Apple still looks expensive to us. Let us know what you think. Back in October, we wondered if there might be a GLP-1 bubble — excessive hype around Eli Lilly and Novo Nordisk, the two companies making glucagon-like peptide-1 (GLP-1) obesity and diabetes drugs. At the time, the drugs had sent the two pharma companies to the top of their respective worlds: Novo Nordisk became the largest company in Europe by market cap, and Eli Lilly became the world’s largest pharma company. That bubble seems to have popped, or at least let out some air. Since we wrote on the subject, shares in Novo are down 31 per cent, and shares in Lilly are down 17 per cent. We offered a couple counterarguments to their soaring valuations — increased competition, Medicare price negotiations, pipeline issues, and lingering questions about demand. All have been at play since October: There is also a “vibes” based component to the sell-off. From Karen Andersen at Morningstar: Wall Street has started paring back its bets on future earnings. Here, for example, are the median revenue estimates for both companies for fiscal year 202
APPLE STOCK MARKET TECH STOCKS Glp-1 DRUGS PHARMACEUTICAL INDUSTRY TARIFFS LEGAL ISSUES COMPETITION
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