Shares of Apple (AAPL), which have risen about 15% year to date, more than twice the S&P 500, have been one of the better-performing names in tech since the new year began. The tech giant has benefited from, among other things, the re-opening of China, its second-largest market.
However, when it comes to the U.S. market, there is still concern regarding the strength of the consumer amid rising inflation and a possible recession. This continues to raise the question of whether the company, which is highly reliant on iPhone sales, can ever return to its glory days of high growth? And if not, will the Services segment grow fast enough to make up the difference? These answers will be more clear when the company reports first quarter fiscal 2023 earnings results after the closing bell Thursday.
Although Apple ended 2022 as the world's most valuable company, it suffered a massive market cap decline of roughly $755 billion, ending the year with a market valuation of $2.07 trillion after reaching $3 trillion to start the year. Supply chain disruptions and rising inflation have been among the many events that have pressured the company's revenue and profits, causing the company to miss iPhone sales estimates in Q4. Operating headwinds have also been compounded by uncertainty related to global growth slowdown, prompting the company to remove Q1 2023 guidance.
Still, it’s still hard to ignore the attractive valuation in Apple heading into 2023. While iPhone sales generate a sizable portion of revenues (accounts for 47% of sales), Apple’s collective high-margin Services segment in 2022 generated a gross margin of 72%, compared to 36% for hardware and devices. The company is poised to see stronger revenue growth and margin expansion, thanks to price increases on Apple Music, TV+ and its One bundle. With a consensus price target of $176, which suggests 30% upside from current levels, the risk-vs.-reward for the stock is attractive.
In the three months that ended December, Wall Street expect the Cupertino, Calif.-based tech giant to earn $1.95 per share on revenue of $121.9 billion. This compares to the year-ago quarter when earnings came to $2.10 per share on revenue of $123.94 billion. For the full year, earnings are expected to rise 1% year over year to $6.17 per share, while full-year revenue of $402.54 billion will rise 2.1% year over year.
The fact that Apple’s full-year revenue and profits are expected to rise just 2% and 1%, respectively, highlights the struggles consumers are facing amid the inflationary climate. Although consumer wages are rising within the monthly job reports, wages have not kept up with the rising costs of living. This trend had a noticeable impact on Apple’s quarterly results, though the company beat on both the top and bottom lines.
In Q4 Apple earned $1.29 per share on revenue of $90.1 billion, topping estimates of $1.27 per share on revenue of $88.8 billion. However, the company miss iPhone sales estimates which came in a $42.6 billion, compared to estimates of $43.4 billion. The Services business, which includes subscriptions to products such as Apple TV+, iCloud storage and Apple Music, rose by 5%, to $19.2 billion. The company continues to do solid job executing amid the macro challenges.
On Thursday investors will be watching closely to see whether (or how) inflation might have impacted spending on Apple’s pricey hardware. The company’s guidance for the next quarter and full year will also be a gauge on the strength of the consumer. Investors will also want an update on the supply issues and its impact on iPhone shipments. Meanwhile, the positive trajectory of Services growth and the company’s gross margin guidance will be key drivers for how Apple stock responds immediately after the report.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
Read Richard's Bio