Can Apple (AAPL) ever return to its glory days of high growth? Estimates for the next five years has Apple growing in only single digits. Apple's iPhone revenues increased only 5.5% in Q2 due to supply chain disruptions and lockdown in China, its second-largest market.
Operating headwinds have also been compounded by uncertainty related to global growth slowdown, rising inflation and interest rates. Meanwhile, Apple stock has has fallen 13% year to date, though they have risen 12.5% in thirty days. Overall, Apple stock has held relatively well during the market selloff. Can that outperformance continue? That answer will be more clear when the company reports third quarter fiscal 2022 earnings results after the closing bell Thursday.
The tech giant should meet its Q3 estimates, according to Wedbush Securities analyst Dan Ives, who has an Outperform rating on Apple stock. “Demand for the iPhone is holding up slightly better than expected," Ives noted, though he cautioned that weakness is still expected ahead of the fall launch of the iPhone 14. "Apple is continuing to focus on a robust product pipeline and services ramp into 2023 including what we believe will be the highly anticipated AR/VR headset release," Ives wrote in a note to clients.
However, Morgan Stanley analyst Katy Huberty said that potential weakness in the company's Mac and services segments could more than offset "solid iPhone results.” Huberty lowered her price target on Apple stock to $180 from $185, citing weak iPad and Mac sales which she expects to be down by 7% and 26%, respectively, from the first quarter. While Apple stock has rebounded strongly over the past month, rising almost 15%, the shares are still down almost 13% year to date. Investors are hoping for more clarity and conviction on the bullish thesis on Thursday.
In the three months that ended June, Wall Street expect the Cupertino, Calif.-based tech giant to earn $1.16 per share on revenue of $82.83 billion. This compares to the year-ago quarter when earnings came to $1.30 per share on revenue of $81.43 billion. For the full year, ending September, earnings are expected to rise 10% year over year to $6.13 per share, while full-year revenue of $393.53 billion will rise 7.6% year over year.
The revenue slowdown is one major overhang for Apple, particularly in the hardware segment (iPhones, Mac, iPad and Wearables) which in Q2 rose at a rate of 6.6% year over year, marking a meaningful growth deceleration from the 61% surge in the year-earlier quarter. It also doesn’t help that interest rates continue to rise, while inflation is also running hot, which have pressured iPhone sales. For the long term, however, Apple’s revenue growth capability is not in question. Apple has navigated through these headwinds before.
Apple’s Services business, which now accounts for some 30% of total revenue, and produces higher profit margins, is expected to offset weakness in hardware. In the second quarter, Services revenue came in at $19.8 billion, reaching an all-time high, thanks to 25% surge in subscribers which reached 825 million, up from 785 million in Q1 and from 660 million in the prior year. The results help the company earn an adjusted EPS of $1.52 for the Q2, while revenue came in at $97.28 billion, beating the $1.43 per share on $94 billion in revenue analysts were looking for.
Despite supply chain shortages, Apple produced iPhone revenue of $50.57 billion, rising from $47.9 billion in the year-ago quarter, driven by strong demand for the iPhone 13 lineup. Investors on Thursday will focus on the company’s guidance for clues suggesting improvements in supply chains as well as Apple’s new devices.
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.
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