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Apple (AAPL) has been a bona fide wealth creator for its investors over the years. The Cupertino-based tech titan has launched numerous revolutionary products that have significantly changed the way we lead our lives - including industry-leading smartphones (iPhone), tablets (iPad), smartwatches (Apple Watch), personal computers (Macbook, iMac) and services (Apple Music, Apple Pay). With a devoted user base and widespread adoption across the globe, Apple became the first U.S. company to achieve a trillion-dollar market cap in August 2018.
In 2023 so far, Apple stock is up 38%, outperforming the S&P 500's ($SPX) rise of 16.7% and the 31% surge of Nasdaq ($NASX).
However, signs of slower iPhone demand in Apple's latest quarterly report sent the stock sharply lower the session after earnings, and AAPL has yet to fill its bear gap on the charts.
So, as the shares trade near two-month lows, is Apple a buy right now - or is it too soon to jump on the stock's post-earnings weakness?
Muted Results for the Latest Quarter
Apple's results for fiscal Q3 topped expectations, but investors sold the news on indications of a revenue slowdown that may extend to Q4. Total net sales for the quarter came in at $81.8 billion, down 1.4% from the previous year (versus the consensus estimate of $81.69 billion). EPS grew by 5% from the previous year to $1.26, which also came in above the consensus estimate of $1.19.
Notably, product sales at the end of the third quarter stood at $60.6 billion, down 4.4% from the year before. Sales of iPhones were down 2.5% year-over-year to $39.7 billion in the quarter, and below the consensus estimate of $39.91 billion.
Apple's revenues have followed a fairly predictable cyclical pattern in recent years, as sales peak in the September and December quarters, and then taper off through the rest of the year. The expected launch of new iPhone models and the holiday season are key drivers for this annual trend. However, Apple compounded the blow of its iPhone sales miss by warning that it expects to announce another year-over-year revenue decline for its September quarter.
The fall in iPhone sales, which still makes up almost half of the company's total quarterly net sales, can be attributed to two reasons. First, higher inflation and interest rates have shifted the spending habits of many potential customers away from discretionary purchases like smartphones in 2023. Second, the new iPhone 15 models are set to launch in September, as per Apple's tradition. Consequently, customers may have delayed iPhone purchases during the quarter at a higher rater than normal.
Critically, sales in the U.S. market - which is the company's largest, in terms of revenue - fell 5.6% from the prior year to $35.4 billion. Sales in the Asia Pacific segment - which includes India, a market the company is betting on heavily to drive sales growth - were down 8% to $5.6 billion.
Worryingly, on a nine-month basis, the company's cash generation from its operating activities fell 9.3% from the prior year to $88.9 billion.
However, growth in revenue from services emerged as a bright spot for the company. Services net sales grew by 8.2% from the prior year to $21.2 billion, and came in above the consensus estimate of $20.76 billion.
Valuation
In terms of personal computing, Apple appears to be relatively overvalued when compared to its peers. Apple is currently trading at a forward p/e of 29.37, p/s of 7.34 and p/cf of 24.58, all of which are much higher than the comparable p/e, p/s and p/cf of Dell (DELL) (19.22, 0.43 and 7.37), and HP (HPQ) (11.04, 0.58 and 11.07), respectively.
Alphabet (GOOGL) might be the biggest competitor of Apple in terms of smartphones and mobile operating systems. Here too, Apple appears to be more richly valued when compared to its fellow tech giant. Alphabet is currently trading at a forward p/e of 23.17, p/s of 5.75 and p/cf of 16.51.
Analyst Estimates
Analysts are expecting Apple's earnings to grow 6.2% and 9.04% in the current quarter and next quarter, respectively. After an overall 0.98% decline in earnings for FY 2023, the consensus is calling for a return to 8.93% growth in fiscal 2024.
Overall, analysts remain cautiously optimistic about Apple stock. The consensus rating is “Moderate Buy” with a mean target price of $205.07, indicating an upside potential of about 14% from current levels. Out of 29 analysts covering the stock, 18 have a “Strong Buy" rating, 3 have a “Moderate Buy” rating and 8 have a “Hold” rating.
Final Takeaway
Apple has revolutionized the consumer tech industry. Each time Apple has debuted a new product, whether it has been the Macbook or the iPhone, a tectonic shift has been experienced in the way consumers use tech in their daily lives. Although the company charges a premium for its devices, the utility has far outweighed the cons for many loyal consumers.
However, Apple has slowed down somewhat in terms of its product innovation in recent times. Its mixed-reality headset - the Vision Pro, announced in June 2023 - was its first new product in a long while. However, I believe the headset, which will tentatively be available in early 2024, will take some time to gain traction among consumers, even hardcore loyal Apple enthusiasts - due to its price point as well as the nascent stage of adoption for the wider metaverse space.
Moreover, a slowdown in sales of its flagship product - the iPhone - coupled with expensive valuations and persistent economic headwinds, makes me skeptical about adding Apple to my portfolio, at least for the near term at current levels.
However, I believe the company's innovative DNA makes it a good long term buy, which will eventually propel the stock to newer heights. So my suggestion is for investors to stay on the sidelines until AAPL retracts further and then initiate an averaging down investment strategy.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
