Apple Inc. (NASDAQ:AAPL) reported earnings last week that were “better than expected.” Whether that is something to get excited about is up to you, but when expectations were already way down, this quarter did not blow me away by any means. A few areas of the business were highlighted, but there are some big areas of concern in the near team.
During the global pandemic, we saw a ton of demand pulled forward for the company, but much of that has fallen off, and I expect further declines moving forward as the US consumer begins to weaken.
I own shares of AAPL, but from a valuation standpoint to go along with economic uncertainty here in the US, I am bearish on the stock in the near-term as the stock price approaches its all-time high around $180.
“Better Than Expected” Quarter
Apple reported their Q2 earnings last week that were “better than expected.” That is a phrase I hate to hear when expectations have already come down. Better than expected does not have to equate to a good quarter.
Let’s take a closer look at the quarter:
- Adjusted EPS: $1.52 per share vs $1.43 per share expected
- Revenue: $94.84 billion vs $92.96 billion expected
- Gross Margins: 44.3% vs 44.1% expected
Before we discuss these results in a little more detail, let me breakout the results by product line:
- iPhone revenue: $51.33 billion vs. $48.84 billion expected
- Mac revenue: $7.17 billion vs. $7.80 billion expected
- iPad revenue: $6.67 billion vs. $6.69 billion expected
- Other Products revenue: $8.76 billion vs. $8.43 billion expected
- Services revenue: $20.91 billion vs. $20.97 billion expected
iPhone sales of $51.3 billion was the big surprise to the upside, which was still only a 2% increase year over year so let’s not get overly amped on that. The upside was due to China reigniting some economic growth and the easing of any supply chain issues that the company had been dealing with for much of the past 12 months.
On the flip side, many seem to be ignoring the slump in Mac sales. Stocks like Advanced Micro Devices (AMD) and Intel (INTC) just to name a few, were punished in part due to weaker demand for PCs. Apple apparently gets a free pass with their Mac sales down over 31% year over year. Outside of the iPhone, Mac is the second largest product segment for the company in terms of revenues.
iPad sales were down 13% year over year and the Other segment, which holds wearable, home and accessories, saw sales decline 1% over prior year.
The company’s service segment saw revenues climb 5% to an all-time high of $20.9 billion, $0.1 billion more than last quarter, but the growth pace has slowed completely.
Company revenues as a whole have now decreased for two consecutive quarters, similar story with operating income as well. Revenues and operating income declined 2.5% and 5.5%, respectively, year over year. Operating margins were 30.8% in 2022 compared to Q2 ’23 which saw 29.9% operating margin.
Things are clearly moving in the wrong direction, but since they were “better than feared” investors are deciding to push the stock higher by roughly 5% after earnings.
Mac sales were clearly a black eye for the company during the quarter, but it was also expected given the reports that came prior to AAPL reporting earnings. The drop is really returning Mac sales to its normal trend we saw prior to the pandemic, which brought a huge amount of demand forward. I for one was a consumer that bought a new Mac during the pandemic.
Here is a look at Mac sales by quarter dating back to 2006.
Where Do We Go From Here?
For me, I see this as an opportunity to take some profits off the table with the stock nearing its all-time high around $180.
Analysts are expecting 2023 EPS of $5.94 per share, which puts shares of Apple at an FY23 earnings multiple of 29.2x. A multiple this high clearly does not offer any real value. For comparative purposes, the stock has traded at a five-year average closer to 22.3x.
The one catalyst I see for the company is the growth in China that we are starting to see once again from numerous companies with exposure to that region. Greater China sales were still down quarter over quarter, but the company provided some color around growth seen in the final month of the quarter, which can give investors some optimism. However, how much of that is priced in at 29x?
Looking ahead, you can see analysts are looking for negative growth in 2023, 10% growth in FY24 and 9% growth in FY25. That is VERY minimal growth for a company trading near 30x.
Apple reported earnings that were “OK” at best, but investors focused solely on iPhone sales surprising. Although the iPhone is the engine that makes the company go, there is a lot more that goes into it and many of the other key product lines saw negative growth causing the company to see sales declines for the second consecutive quarter.
In addition, not a ton of growth is expected moving forward as the company is expected to see EPS decline in FY23, but not surpassing 10% over the next few years. Paying a premium for such little growth just to own shares of Apple is not something that gets me excited.
I am using this time to lower my position for the near-term.