As one of the most popular and successful stocks in recent history, Apple AAPL is always top of mind when it comes to the stock market. The world’s largest public company will be reporting Q1 FY23 earnings Thursday, February 2 after the market closes.
What AAPL does, the stock market follows, so how the tech giant fairs will be a major factor on the stock market as a whole.
With iPhone sales showing early signs of slowing, and supply chain issues slowing production it makes you wonder what the future holds for Apple. On the flip side, Apple is as good as they get when it comes to engineering new products. Being able to diversify the product suite like Apple has done, is an amazing feat, and the culture of innovation is something that should stay with the company for a long time to come.
The last year has been mixed for Apple, down about -10% on the year, but still outperforming the market. Additionally, AAPL stock has fared better than all the other mega cap technology companies, including Amazon AMZN, Google GOOGL, Microsoft MSFT, Meta Platforms META, and Nvidia NVDA.
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Expanding Portfolio
Apple’s flagship product, the iPhone, has played a critical role in establishing the company as a leader in the tech industry and continues to drive its revenue growth. But Apple’s other products play a major role and have helped it transform into far more than just an iPhone maker.
Apple’s Services offerings including, cloud, App store, Apple Music, AppleCare, Apple Pay and Apple Tv have become a major contributor, especially to the bottom line, as these are high margin products. As the new cash cow, Apple Services is becoming increasingly important to Apple’s business model.
Furthermore, products like the Apple Watch, and AirPods are highly successful, and dominant businesses in their own right.
Apple generated $394.33 billion in total revenue in fiscal 2022, with 52.1% coming from iPhone sales. Services contributed 19.8%, Mac contributed 10.2%, iPad contributed 7.4%, and the combined category of Wearables, Home, and Accessories products pulled in 10.5%.
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Earnings Expectations
After growing revenues 33% in FY21 and 8% in FY22, current year sales are projected by Zacks to grow just 2% to $402 billion, as Apple faces a decelerating economy.
Apple’s first quarter sales are expected to shrink -2.2% to $121 billion. Earnings are challenged as well, with FY23 expected to be up 1.1% to $6.18 per share, while Q1 earnings are forecasted to be down -7.6% to $1.94 per share.
Apple looks poised to return to a more substantial expansion with FY24 sales estimated to climb 5.6% to $425 billion, and earnings to climb 8.5% to $6.70 per share.
With these mixed earnings expectations it is no surprise Apple currently has a Zacks Rank #3 (Hold). Earnings revisions, Zacks primary input for the ranking methodology, are trending downward as well. Over the last 90 days Q1 earnings expectations have been lowered from $2.10 per share to $1.94 per share.
On a positive note, Apple has been able to avoid the mass layoffs of the other tech giants like Amazon, Alphabet, Microsoft and Meta Platforms. Alphabet has cut 12,000 jobs, Microsoft 10,000, Amazon 18,000, and Meta 11,000.
Additionally, Apples sales growth over the last few years need to be highlighted. Sales for Apple have grown from $275 billion in 2020 to $400 billion today, which for such a massive and mature company is incredibly impressive.
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China Risk
Something I don’t think gets enough attention is the geopolitical risk Apple faces with so much of its production based in China. There is no denying that tensions between the US and China are continuing to grow, and Apple seems it could be a valuable bargaining chip for the world’s second largest economy.
The Covid-19 pandemic shook supply chains and made everyone realize how fragile a globalized production line can be. As the trend towards onshoring production gains momentum, it’s worth considering how companies like Apple may mitigate the potential risks, particularly given the significant proportion of their production currently taking place in China.
Valuation
Considering the praise Apple receives today as a business it’s hard to imagine that between 2013 and 2019, investors could buy the stock relatively cheaper than the S&P 500. In 2013 Apple traded with a forward P/E of just 8x.
Today AAPL’s one year forward P/E is 22x earnings, above the index and its ten-year median of 14x. The reasoning is that Apple stock is practically considered as sure an investment as a Treasury bond, and maybe for good reason. Imagine owning the real estate of the little screen we all look at every day, quite powerful.
Also worth noting is Apple’s large cash balance. With nearly $50 billion on hand, and some of the greatest engineering talent in the world, Apple can venture into any vertical they choose. Whether it be cars, healthcare, VR or AR this optionality allows AAPL stock to always have something new to surprise consumers and investors with.
It seems unlikely investors will get an opportunity to buy AAPL stock as cheap as it was in the 2010s. Now well off its all-time highs, a near 20x multiple seems almost reasonable. But the key to this notion is how badly sales will be affected in a recession. What about a bad recession?
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Conclusion
Apple is without a doubt an unbelievable business. The iPhone has become a critical part of our lives, and maybe the most influential consumer technology ever. Even more impressive is how Apple has managed to engineer a number of other highly successful hardware and software products, diversifying its income streams.
Apple will likely be around for many years to come, but whether it is a buy today is debatable. With slowing sales from a wavering economy, to geographical, and supply chain risk it is up to investors to decide what they are comfortable with. The earnings report will provide a great deal of insight into the future.
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