Will 2022 be a good year for Apple stock (AAPL) and its investors? One otherwise bullish expert has shared a few words of caution.
Loup Ventures’ Gene Munster stated earlier this month that Apple should be valued at over $4 trillion market cap. But more recently, he has sounded the alarm on Big Tech as a group. The Apple Maven digs deeper and debates: what can investors expect of AAPL and its tech peers in the new year?
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The cautious AAPL bull
As a recap, Mr. Munster is bullish on Apple for two key reasons: the metaverse and autonomous vehicles. He is not alone in his optimism, as several Wall Street analysts now believe that Apple stock will climb past $3 trillion in market value, in part due to these same drivers.
However, Loup Venture’s managing partner also believes that Big Tech (a group to which Apple belongs) could have a tough year ahead. This is the case primarily because of higher interest rates in 2022, which could lead to a contraction in valuation multiples.
Among the Big Tech stocks cited by the expert are not only Apple, but also Amazon (AMZN) - Get Amazon.com, Inc. Report, Netflix (NFLX) - Get Netflix, Inc. Report, NVIDIA (NVDA) - Get NVIDIA Corporation Report, Tesla (TSLA) - Get Tesla Inc Report and Rivian (RIVN) - Get Rivian Automotive, Inc. Class A Report.
Our take: no reason to fear
On the surface, Gene’s argument makes sense. Big Tech has had an impressive couple of years of returns, and “free cash” added to the system may have had something to do with it.
Let’s assume a hypothetical portfolio with the five stocks mentioned above (ex-Rivian, due to the company’s very recent IPO), equally weighted and rebalanced quarterly. Below, I compare the portfolio’s performance (blue line) against the S&P 500 ^SPY since the start of 2020.
Source: Portfolio Visualizer
Big Tech has outperformed the broad market by a factor of four in the past 24 months: annualized returns of 97% vs. SPY’s 23%. Even more interestingly, the group’s steepest drawdown from a prior peak, using month-end price points, has been only 14%.
Is it reasonable to expect tech stocks to double in value each year over the long run? No, it isn't. Therefore, in an environment of monetary tightening, the group could very well underperform for a year or two. But I would not be too concerned — not to the point of avoiding Big Tech altogether in 2022.
The same five stocks above have produced annualized returns of over 50% for the past decade. I think that this is a reflection of these companies’ secular ability to grow and impress investors with market dominance and strong financial performance.
So, avoiding Big Tech in fear of short-term underperformance could end up hurting a portfolio’s return, should the investor miss out on the next leg higher.
The other reason for setting the fears aside is that the market has had plenty of opportunities to price in next year’s interest rate hikes. Keep in mind that the Federal Reserve turned decisively more hawkish in December 2021 — and stocks spiked instead of selling off.
Should growth stocks suffer next year due to rising rates, the likes of TSLA and RIVN would probably take a bigger hit before AAPL feels any of the impact — or at least I would expect so.
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Is the price right?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)