Apple: Time to reset expectations (NASDAQ:AAPL)

Apple: Time to reset expectations (NASDAQ:AAPL)
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Apple (NASDAQ:AAPL) has been the glue that has held the big tech sector together over the course of the past week. When the likes of Amazon (AMZN), Metaplatforms (GOAL), Microsoft (MSFT), Y alphabet (GOOGLE) reported poor or “OK” numbers with weak guidance, those stocks fell and some fell really hard.

Take a look at the performance of these stocks over the last six trading days:

  • GOAL down more than 30%
  • AMZN falls more than 25%
  • GOOGL is down more than 15%
  • MSFT down more than 12%

Then comes AAPL, which reported fourth quarter earnings towards the end of the week, and they were pretty strong. AAPL shares rose nearly 8% the day after it reported earnings.

Given that the consumer is beginning to weaken, which has become more apparent with the plummeting personal savings numbers that have been wiped out due to high inflation and rising interest rates, I think the winds in against the consumer are cause for concern in regards to AAPL’s actions. .

Fourth Quarter Earnings Sufficient

Apple Fourth Quarter 2022 Reported Earnings which showed the following:

  • EPS $1.29 vs. estimated $1.27
  • Income. $90.15 billion vs. $88.90 billion estimate, up to 8.1% year after year
  • iPhone revenue: $42.63 billion vs. $43.21 billion estimate, up to 9.67% year after year
  • Mac Income: $11.51 billion vs. $9.36 billion estimate, up to 25.39% year after year
  • revenue per iPad: $7.17 billion vs. $7.94 billion estimate, down 13.06% year after year
  • Income from other products: $9.65 billion vs. $9.17 billion estimate, up to 9.85% year after year
  • Service revenues: $19.19 billion vs. $20.1 billion estimated, up to 4.98% year after year
  • Gross margin: 42.3% vs 42.1% estimated

Apple won both the top and bottom lines, but revenue from the iPhone and iPad fell short. Mac revenue, on the other hand, was up 25% from a year earlier.

Apple didn’t provide any additional guidance for its first quarter of 2023, which tends to be the strongest quarter of the year as it falls within the holidays.

Some of the revenue earned during the quarter was attributed to third quarter sales that were not met due to supply chain issues at the time, but most of those issues have been resolved.

The headwinds are evident

When evaluating a stock, it is always important to look from the outside in. I like to focus on the macro environment first and see how it can affect a specific company before looking more at company-specific metrics.

From the point of view of the macro environment, the headwinds are evident. It’s no secret that Apple generates the majority of their revenue outside of the US and that means they continue to battle against the currency’s headwind. Apple CEO Tim Cook stated that revenue would have grown “double digits” were it not for the strength of the US dollar.

Mr. Cook went on to explain that “foreign currency headwinds exceeded 600 basis points during the most recent quarter,” which is quite significant.

Although the most recent quarter did not encounter as many supply chain issues, as the management team explained, one area that did experience supply constraints was the iPhone 14 Pro. Based on orders and wait times, the iPhone 14 Pro more expensive has been selling quite well. The (regular) iPhone 14, on the other hand, not so much, and this is where a lot of rumors have surfaced about vendors pausing work based on Apple’s direction.

Glass supplier to Apple Corning (GLW) noted in its most recent quarterly report that smartphone and tablet sales have slowed, which could reserve a review for Apple’s next quarter.

The next headwind is one that could hurt more, a weakened consumer. Recent financial data showed signs that the US consumer may be collapsing. The total US credit card balance affected $916 billion in September, as consumers turn to credit to help deal with high inflation. Also, the boom in the personal savings rate that we heard about during the pandemic is all but gone. In fact, the US personal savings reach $555.7 billionwhich was the lowest level seen since 2009.

A weakened consumer means larger purchases like iPhones, iPads, Macs and whatnot will be called into question.

And finally, Apple’s services segment, which many have held high for years, is starting to slow down. In the fourth quarter, the Services segment grew only 5%. In fact, total quarterly revenue has fallen for two consecutive quarters now for the first time in history.

To combat this, Apple recently announced price increases on many of its service offerings, including: Apple Music, Apple TV+, and Apple One.

Investor Takeaway

Apple has held the tech sector together for the most part in what was a brutal earnings season for the sector, but I don’t see that being the case for much longer. Apple themselves didn’t give any guidance, but they did give “direction” and that was mostly focused on a slow holiday season, which is typically their best quarter yet.

Given all of this and the headwinds I mentioned, I think it’s important for analysts and investors to readjust expectations with the stock.

Apple is trading at a 24x price-to-earnings multiple and I think this is too high given the expectations for next year. At this time, analysts expect EPS of $6.28 and revenue of $407.5 billion, which would equate to growth of 2.8% and 3.3%, respectively. Paying 24 times for a company that grows in those fractions is too high, which is why I think the stock needs to go down.

I love AAPL and think it can be an essential part of your portfolio, but adding stocks at these levels is not in my plans at the moment.

Disclaimer: This article is intended to provide information to interested parties. I am not aware of your individual objectives as an investor, and I ask that you complete your own due diligence before purchasing any stock mentioned or recommended.

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