More than $200 billion of Apple’s market capitalization vanished in a few days

Due to the size of Apple, even a small drop in its stock price seems quite significant in terms of market capitalization. However, the recent decline has been large even by the company’s historical standards. The turbulence began on August 3 when Apple reported that its iPhone sales were significantly below estimates from Wall Street for the June quarter, leading to a 1 percent drop in the company’s total revenue compared to the previous year, to $81.8 billion.

Although Apple has increased revenues in the services segment in recent years—adding billions to its top line from the App Store, iCloud services, as well as Apple Music, Apple TV+, and Apple Pay—iPhone sales still account for about 50 percent of total revenue. As a result of this reliance on the iPhone, the drop in sales led to a decline in stock value.

Rosenblatt analysts labeled Apple’s stock as ‘neutral’, downgrading it from ‘buy’, claiming that the company has entered a phase of slowing. Loop Capital analyst Ananda Baruah also downgraded his rating to ‘hold’ from ‘buy’, noting that Apple’s current revenue guidance is at risk if iPhone sales do not increase during the remainder of the year.

A Tough Quarter

It has been a tough quarter for Apple’s entire hardware sales business. iPhone revenues fell 2.4 percent year-on-year to $39.7 billion, Mac revenues fell 7.3 percent to $6.8 billion, while iPad revenues fell 19.8 percent to $5.8 billion. Another reason for the recent sell-off of Apple shares was management guidance that was weaker than expected, analysts note. For the September quarter, Apple stated that it expects gross profit margins to be between 44 and 45 percent, with steady to slightly slower year-on-year revenue growth. While revenues from the iPhone and services segments could see a slight acceleration, Apple CFO Luca Maestri stated that he expects that revenues for Mac and iPad will continue to decline throughout the year.

High Valuation

Apple’s rich valuation is the third key reason why the stock is under pressure, according to analysts. Despite three consecutive quarters of declining revenue, Apple shares have risen 51 percent since the beginning of the year. Even after the recent drop in stock price, Apple still trades at about 30 times earnings. In comparison, the S&P 500 trades at about 20 times earnings, according to WSJ data.

Some analysts point to Apple’s cost-cutting measures and rising high-margin service revenues as reasons to pay a premium for the stock, noting that total net income rose 2.3 percent to 19.9 billion dollars in the June quarter, while service revenue jumped 8 percent to a record high of 21.2 billion dollars.

Apple’s last quarter was enough to scare investors, but the reaction from Wall Street analysts was mixed, with many big names remaining optimistic about the long-term prospects of the tech giant despite recent problems. While investors fear that the drop in iPhone sales is a sign of declining demand for Apple’s most important product, optimistic analysts note that, on a constant currency basis, revenues from the iPhone segment actually rose 1.4 percent year-on-year in the last quarter. For example, iPhone revenues in China rose 8 percent year-on-year in the second quarter, and significant growth was also recorded in India, although Apple did not provide exact figures.

While most analysts are optimistic about Apple’s long-term prospects, some are concerned that there could be a larger drop in the short term due to the company’s high valuation and declining revenues.

UBS analyst David Vogt noted that despite ‘disappointing’ hardware sales, Apple is currently trading at a premium of about 50 percent over the S&P 500.