Apple’s new dawn, NIO layoffs, and Maersk valuation

Key points in this equity note:

• Apple’s revenue outlook for the current quarter disappoints investors, and the underperformance in China is a concern, but its pricing power and demand in services are offsetting these weaknesses. The long-term case is still intact.
  
  
• The Chinese EV maker NIO is considering cutting 10% of its workforce after saying in September that it was considering raising $3bn from investors adding fresh concerns over demand for EVs and the profitability levels going forward.
  
  
• Maersk announces subdued outlook for the world’s container shipping market over the next 2-3 years sending valuations to levels significantly below the pre pandemic years.

Apple’s low growth offset by pricing power in services

The world’s most valuable company reported earnings yesterday with revenue growth in line with estimates and operating income beating estimates (EBITDA was up 7% y/y). Investors were disappointed by Apple’s revenue growth outlook for the current quarter (ending 31 December) at zero growth as analysts had consensus revenue growth at around 5%. The long-term case is still good for Apple, as the pricing power in services will continue to underpin growth in operating income. Apple recently raised the price substantially on its Apple TV offering.

A negative factor in the previous quarter was the lower than expected Greater China revenue at $15.1bn vs est. $17bn, but with CEO Tim Cook highlighting all-time revenue record in India, and with recent buildup of manufacturing capacity in India, it is clear that Apple is beginning to prepare for a future with much smaller Chinese exposure both on revenue (around 18-20% today) and manufacturing. It market power in the digital consumer economy is remarkable and will continue to carry the company forward. The current shareholder yield (dividends plus buybacks) is 3.5%, so Apple is moderately priced relative to the bond market.

NIO to cut 10% of workforce raising questions over EV industry

The EV industry has been hit hard lately with demand impacted from rising interest rates which was confirmed by Tesla CEO Elon Musk in the recent downbeat Q3 earnings call. Battery EV volume fell in China in September (but growing slightly m/m in October) and competition is heating up massively this year and next year, and back in September Nio said that it was considering raising $3bn from investors to shore up its balance sheet as the Chinese EV-maker is still not profitable. Our view is still the same as it has been for over a year that investors should bet on the parts of the EV ecosystem that is independent of who wins the EV race among the carmakers. So investors should think about exposure to battery recycling, EV charging, copper, lithium, and battery manufacturing.

Maersk valuation plunges to unusual levels

Maersk, the world’s largest container shipping company, reports this morning Q3 results in line on EBITDA but missing a bit on revenue. Maersk maintains its fiscal year underlying EBITDA of $9.5bn to $11bn, but is cutting its workforce by 10,000 people to adjust operating expenses to the new reality post the pandemic. The company says that overcapacity will continue to pressure rates and it does not see a big recovery in volume in 2024 expecting a subdued environment for the next 2-3 years. The buyback programme is also under review. In other words, Maersk is going back to the old days from before the pandemic.

In that light the valuation of Maersk seems as an extreme outlier. In FY19 before the pandemic Maersk was valued at an enterprise value of $41.8bn on EBITDA of $5.8bn and analysts expect EBITDA in FY24 to be around $6.4bn with the current enterprise value at $19.3bn. This is a massive reduction in the valuation also reflected by the chart below. If the post pandemic environment for shipping is similar to the pre pandemic years (the container freight rates are more or less the same now) then the valuation should in theory reflect the pre pandemic levels.