Apple Inc. (AAPL) has been in the news lately due to the recent developments where the Chinese government banned the use of iPhones and other AAPL products for government employees. The tech giant’s annual product launch event, dubbed ‘Wonderlust,’ is due today, where it is set to reveal a series of updates over its product range.
In this piece, I have discussed why adding AAPL to one’s watchlist could be wise.
AAPL’s third-quarter EPS was 5.5% above analyst estimates, while its revenue matched the consensus estimate. Despite its total revenue falling year-over-year, its services revenue reached a new all-time high.
AAPL’s CEO Tim Cook said, “We are happy to report that we had an all-time revenue record in the Services during the June quarter, driven by over 1 billion paid subscriptions, and we saw continued strength in emerging markets thanks to robust sales of iPhone.”
Commenting on the company’s third-quarter performance, AAPL CFO Luca Maestri said, “Our June quarter year-over-year business performance improved from the March quarter, and our installed base of active devices reached an all-time high in every geographic segment. During the quarter, we generated very strong operating cash flow of $26 billion, returned over $24 billion to our shareholders, and continued to invest in our long-term growth plans.”
Amid rising geopolitical tensions between the United States and China, the Chinese government banned the use of iPhones at work in what was seen as an effort to reduce security risks posed by Apple devices. China’s latest move is the latest development in the ongoing trade and tech war between the two largest economies.
Nikkei reported that some state-owned companies were prohibiting employees with trade secrets from bringing AAPL products to their workplaces. China’s move to stop government employees from using AAPL products led to the company’s market capitalization falling by over $200 billion last week.
China is a crucial market for AAPL, with sales from its Greater China segment accounting for 20% of sales in the third quarter. During the third quarter, its Greater China sales rose 7.9% year-over-year to $15.76 billion.
The company is expected to launch its much-awaited iPhone 15 later today, along with new Apple watches. AAPL is expected to shift away from its famed Lightning connector and adopt a USB-C port.
The stock has performed exceptionally well this year. Despite the recent ban, the stock has gained 38% in price year-to-date and 14% over the past year to close the last trading session at $179.36.
Here’s what could influence AAPL’s performance in the upcoming months:
Mixed Financials
AAPL’s total net sales for the third quarter ended July 1, 2023, declined 1.4% year-over-year to $81.80 billion. Its operating income declined 0.3% over the prior-year quarter to $23 billion.
Its gross margin increased 1.5% year-over-year to $36.41 billion. Its net income rose 2.3% over the prior-year quarter to $19.88 billion. Also, its EPS came in at $1.26, representing an increase of 5% year-over-year.
Mixed Analyst Estimates
Analysts expect AAPL’s EPS and revenue for fiscal 2023 to decline 0.8% and 2.8% year-over-year to $6.06 and $383.25 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to increase 8.6% and 6.2% year-over-year to $6.58 and $406.85 billion, respectively.
Its EPS for the quarter ending September 30, 2023, is expected to increase 7.6% year-over-year to $1.39. Its revenue for the same quarter is expected to decline 1% year-over-year to $89.24 billion.
High Profitability
In terms of the trailing-12-month net income margin, AAPL’s 24.68% is significantly higher than the 2.03% industry average. Likewise, its 32.29% trailing-12-month EBITDA margin is 252.8% higher than the industry average of 9.15%. Furthermore, the stock’s 3.15% trailing-12-month Capex/Sales is 30.1% higher than the industry average of 2.42%.
Stretched Valuation
In terms of forward EV/EBITDA, AAPL’s 21.93x is 51.1% higher than the 14.51x industry average. Likewise, its 7.17x forward EV/Sales is 162.8% higher than the 2.73x industry average. Its 29.60x forward non-GAAP P/E is 29.7% higher than the 22.81x industry average.
Solid Historical Growth
AAPL’s revenue grew at a CAGR of 11.9% over the past three years. Its net income grew at a CAGR of 17.5% over the past three years. In addition, its EBIT grew at a CAGR of 18.7% in the same time frame.
POWR Ratings Reflect Uncertainty
AAPL has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AAPL has a D grade for Value, consistent with its stretched valuation. Its 1.27 beta justifies its C grade for Stability.
It has an A grade for Quality, in sync with its high profitability.
AAPL is ranked #20 out of 42 stocks in the Technology - Hardware industry. Click here to access AAPL’s Growth, Momentum, and Sentiment ratings.
Bottom Line
Despite the excitement around its annual product launch event, where it is expected to launch the new iPhone, the possibility of a ban on Apple products expanding in China and an overall uncertain macroeconomic environment cast a shadow on the company’s near-term prospects.
Although the ban is unlikely to cause financial trouble to AAPL, investors are concerned that the development may open the possibility of a complete ban due to the worsening geopolitical relations between the United States and China. Additionally, AAPL will likely face competition in China from Huawei, which made its comeback with the Huawei Mate 60 series.
Given its mixed fundamentals and analyst estimates, it could be wise to wait for a better entry point in the stock.
How Does Apple Inc. (AAPL) Stack Up Against Its Peers?
AAPL has an overall POWR Rating of C, equating to a Neutral rating. You may check out other stocks within the Technology – Hardware industry, such as Panasonic Holdings Corporation (PCRFY), Daktronics, Inc. (DAKT), and AstroNova, Inc. (ALOT), with an A (Strong Buy) or B (Buy) rating. For exploring more A and B-rated hardware stocks, click here.
What To Do Next?
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AAPL shares were trading at $175.41 per share on Tuesday afternoon, down $3.95 (-2.20%). Year-to-date, AAPL has gained 35.58%, versus a 17.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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