Apple (AAPL) -) shares fell on Friday after the tech giant posted its third straight quarterly sales decline but indicated slumping iPhone revenue could improve into the autumn as the tech giant prepares for its crucial September production launch.
Apple said earnings for the fiscal third quarter ended in June rose 5% from a year earlier to $1.26 a share, topping Wall Street forecasts. But revenue was down 1.4% to $81.8 billion as iPhone sales fell 2.5% to $39.67 billion, missing analysts' estimates.
Revenue from Apple's key services business, a bright spot for the tech giant that includes Apple Pay, iCloud and Apple TV, rose 8.2% to $21.21 billion. Chief Financial Officer Luca Maestri said that division would likely extend its run of gains into the September quarter "assuming that the macroeconomic outlook doesn't worsen from what we are projecting today."
"We expect iPhone and Services year-over-year performance to accelerate from the June quarter," Maestri told investors on a conference call late Thursday. "Also, we expect the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac."
Apple shares were marked 2.95% lower in premarket trading Friday to indicate an opening bell price of $185.55 each, a move that would still leave the stock up more than 42% for the year with a market value of more than $3 trillion.
Apple: a Difficult Backdrop Into September
Citigroup analysts noted Thursday that since 2016, Apple stock has outperformed the S&P 500 by around 8% between the release of its third-quarter earnings and the September launch of its new iPhone model.
The group's disappointing iPhone sales, however, as well as a cautious forecast for consumer demand from rivals such as Samsung Electronics and its key supply-chain ally, Foxconn, suggest a difficult backdrop heading into the September launch and the crucial holiday period for the world's most-valuable tech company.
Earlier this month, Taiwan-based Foxconn, a key Apple assembler responsible for around 70% of the tech giant's iPhone shipments, said current-quarter revenue was likely to improve. But it provided only a cautious outlook heading into its second-quarter earnings next week.
Samsung, meanwhile, posted its second-weakest quarter profit it 14 years -- although its mobile division is winning share in the high-end space with its lineup of new foldable smartphones. The Galaxy Z Fold5 is priced at a 12.2% premium to Apple's iPhone 14 Pro Max.
Apple is likely to unveil its new iPhone 15, including a Max version, in early September, with reports suggesting tweaks to its design, including a new USB-C charging port.
But little has been suggested that the new lineup will be significantly different from existing models, as the iPhone 15 is likely to be powered by the same A16 Apple-made chip found in iPhone 14s.
New IPhone Expected to Cost More
Prices, however, are likely to rise by at least $200 for the new base model, testing consumer appetite. That's as discretionary spending begins to fade and student-loan payments are forecast to take around $100 billion from overall consumer spending in the U.S. each year, according to Oxford Economics.
"We fear the U.S. upgrade cycle is coming to a halt, upgrade rates are at all-time lows, and likely to result in weak Americas revenue," said KeyBanc Capital Markets analyst Brandon Nispel. He maintained what he called a "cautiously overweight" rating with a $200 price target following Apple's third-quarter-earnings report.
"While we maintain that user growth > unit growth, and Apple's switchers hit an all-time high, we believe this could put pressure on the stock, which has outperformed year-to-date and trades near all-time high valuation, despite no revenue growth," he added.
D.A. Davidson analyst Tom Forte, who carries a neutral rating with a $180 price target on Apple stock, is also concerned that near-term sales may face a challenge. That's related to the "low-hanging fruit" of carriers such as AT&T (T) -) and Verizon (VZ) -) effectively subsidizing around half of U.S. iPhone purchases through installment plans.
"We are also concerned wireless carriers may not subsidize the 15 as much as they have recent models, as part of an overriding strategy of inspiring consumers to upgrade to take advantage of their 5G networks, having spent billions on upgrading their networks," Forte said.
Wedbush: 'Strong Buyers on Weakness'
Wedbush analyst Dan Ives, however, points to Apple's installed base of around 2 billion, around 1.2 billion of which are estimated to be iPhones, as well as the resilience of Apple's services-division revenue, as evidence of the iPhone's importance and potential for the stock's second-half performance.
"When excluding FX and focusing on the hearts and lungs iPhones and Services, this was a strong performance and guidance in our view, and we would be strong buyers on any weakness," said Ives, who carries an outperform rating with a $230 price target on Apple stock.
"Overall, this remains a golden installed-base story as Apple further penetrates its unmatched ecosystem with our estimate that ~25% of its install base has not upgraded its iPhone in 4 years," he added. "And we also believe [application-service providers] are bumping up towards a roughly $900/$925 setting up for a new 'mini super cycle' despite the murky macro."
Gene Munster of Deepwater Asset Management also sees the installed base as a key to Apple's performance but argues that the company should be treated as a consumer staple as opposed to a tech company.
"The Apple flywheel is alive and well, following a 20-year success story in which consumers buy one Apple product, fall in love, buy another product, add a service, upgrade, and repeat," he said.
"I believe we are entering a new chapter of how investors view Apple," he said. "Over the next five years, I expect investors will increasingly see Apple as a can’t live without consumer staples company."
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