Apple Inc. stock (NASDAQ:AAPL) rose as much as 8% the day after the iPhone maker reported above-consensus revenue and EPS for the September quarter. Total revenue of $90.15 billion (+8% year-over-year/+14% ex-FX) and diluted earnings per share of $1.29 (+4% year-over-year) beat Street estimates of $88.8 billion and $1.27.
For the December quarter, management did not provide any specific top-line guidance due to macroeconomic uncertainty, but did note the following:
- YoY revenue growth will slow from +8% yoy in the September quarter, while the exchange rate will hit revenue by 10 points.
- Gross margin between 42.5%-43.5%.
- OPEX between $14.7 billion and $14.9 billion.
- OI&E will be around -$300 million.
The tax rate will be around 16.5%.
The Street currently expects Apple to grow revenue by 2.7% year-over-year to $127 billion and generate EPS of $2.08 (-1% year-over-year) in the current quarter.
Revenue of $42.6bn (+10% year-over-year) was slightly below the consensus of $43bn, but management highlighted strong demand for the 14 Pro and 14 Pro Max, where supply has been constrained from the start. As a percentage of revenue, the iPhone remained the top contributor at 47% in the fourth quarter, even though the product has been around for 15 years.
According to JPM Availability Tracker, global iPhone lead times for 14/14 Plus/14 Pro/14 Pro Max increased to 3/3/31/31 days in week 8 from launch vs. 2/2/24/24 days per week. 7. Delivery times for the 14 Pro and 14 Pro Max were in line with comparable 13 models, while those for the base 14 models were shorter.
It is not common to see an increase in lead times after many weeks from launch, so recently extended lead times could be attributed to covid disruptions in Zhengzhou, China, where a major Foxconn iPhone assembly plant is located. With China consistently adopting a zero-Covid policy in major cities, Apple could see an iPhone shipment shortfall in the December quarter if conditions don’t improve in Zhengzhou (responsible for 50% of global iPhone supply).
This again highlights Apple’s production risk in China. For perspective, Chinese contractors currently account for 98% of Apple’s iPhone production. Apple is already targeting move production to other countries such as Vietnam and India. It’s unclear how quickly Apple can reduce its reliance on China, but according to Bloomberg it could take up to 8 years just to move 10% of production capacity out of the PRC.
Mac revenue rose 25% year-over-year to $11.5 billion, boosted by the launch of the new MacBook Air and MacBook Pro powered by the M2 chip, made with Taiwan Semiconductor (SST) 4nm process. The increase in revenue was also due to Apple being able to meet unmet demand in the June quarter due to supply chain disruptions.
Looking ahead to the December quarter, management guided a challenging offset to Mac earnings on top of FX headwinds. At C4Q21, Apple released the new M1 MacBook Pro, which was a key contributor to the top lineup. However, the Mac has performed extremely well in a tough PC market, with a sixteen% market share in 3Q22, up from 15.3% in 2Q and 14.5% in 1Q.
Revenue decreased 13% year over year to $7.2 billion due to negative foreign exchange and difficult compensation due to the launch of new iPad models last year. However, management noted a record installed base for the iPad, with 50% of purchases in the September quarter being from first-time buyers. In October, Apple launched the 10th generation iPad starting at $449.
Wearables, Home and Accessories
Revenue grew 10% year-over-year to $9.7 billion thanks to new products including Apple Watch and AirPods Pro. According to management, Watch was a key blue chip contributor with 2/3 of sales coming from first-time customers, again a positive aspect in the worldwide installed base of iOS. The new Watch SE, Watch 8 and Watch Ultra remained in limited supply during the September quarter.
Revenue from Apple’s Services division rose 5% year-over-year to $19.2 billion during the September quarter, while management noted growth would have been in double digits excluding the impact of currency. Additionally, Apple Services reached over 900 million paid subscriptions vs. 745 million in F4Q21.
Within services, management expects weakness in digital advertising and gaming to extend into the current quarter, while the negative exchange rate will also put pressure on top line revenue. This is potentially due to macro factors including a broader pullback in ad spend and lower gaming engagement post-Covid. According to Sensor Tower data, global app store revenue saw a 4% year-over-year decline in October (as of 10/30), while China app store revenue (26% of global revenue QTD) decreased by 3% year-on-year in October (10/30) . Additionally, games (55% of global app store revenue) fell 12% year over year.
According to BofA estimates, Apple’s App Store and Licensing – Google (GOOG) pays Apple to be the default search engine on all iOS devices; could represent more than 60% of total service revenue. While SensorTower data cannot predict Apple’s service revenue with 100% accuracy, the trend remains negative in the current context of slowing consumer demand.
Investors generally viewed Apple’s results and prospects as better than feared, and felt confident enough to jump into action, while most other major tech names were crushed after the launch. Posting your earnings. So far this year, Apple shares are down just 15%, while Microsoft (MSFT), Google, Meta (GOAL) and Amazon (AMZN) are down 32%, 37%, 72%, and 42%, respectively.
Investors are clearly treating Apple as a safe haven in this market, but the resilience of Apple’s business in the current cycle is likely to be well understood, making any additional macroeconomic pressure in 2023 seem somewhat underestimated.
While services are commonly heralded as the next big engine of growth, the story seems less inspiring today in light of two consecutive quarters of declining revenue, as well as unfavorable trends in the current quarter.
The iPhone should continue to function thanks to a persistent user base that will create upgrade/replacement opportunities. However, the product has been around since 2007 and the new models are becoming less revolutionary. Although 5G could be the next driver, smartphones in general are at a much more mature stage of the product lifecycle today compared to 3-5 years ago. For now, it’s unclear what the “next big thing” is for Apple (VR in 2023? Apple Car in 20XX?).
With future earnings of 22x, Apple stock appears to be fully valued as investors have been dealing with a tough environment where there simply aren’t many high-quality stocks to put their money into. This has been the dominant investment psychology all year, so I would wonder if the markets are buying Apple for Apple’s sake. As much as Apple is a great company, it’s never ideal to overpay for stock.