Apple: Relief rally won’t hold (NASDAQ: AAPL)

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After a crazy earnings week in tech mega-corporations, Apple (NASDAQ: AAPL) reported a decent quarter relative to fears. Landmines hit by other FAANG stocks led the stock to rebound 8% on a strong relief rally in the stock market. My investment thesis remains bearish on Apple as the decent quarter compared to weaker results elsewhere was not enough to justify a rise in the share price.

Considering the solid neighborhood

Apple announced that fourth-quarter 2022 revenue rose 8.1% to $90.1 billion. The tech giant beat analysts’ revenue estimates of $1.4 billion in the quarter.

The company reported the following YoY revenue growth in each unit compared to FQ4’21:

  • Revenue – $70.96 billion from $65.08 billion, up 9%.

  • iPhone – $42.63 billion vs. $38.87 billion, up 10%.

  • Mac – $11.51 billion vs. $9.18 billion, up 25%.

  • iPad – $7.17 billion from $8.25 billion, down 13%.

  • Wearables, home and accessories – $9.65 billion versus $8.79 billion, up 10%.

  • Services – $19.19 billion versus $18.27 billion, up 5%.

Remember that Apple benefited from supply chain disruptions that dampened revenue by up to $4 billion in the prior quarter, with the issues mostly resolving in the quarter. Additionally, the company has been hit by currency headwinds similar to other tech companies. The amounts seem to almost offset each other in the September quarter.

Most telling of the results is that Apple wanted to temper expectations for the key holiday quarter. The tech giant faces a more delayed impact from global recession fears compared to tech giants tied to e-commerce and digital advertising.

During the FQ4’22 earnings call, the CFO highlighted a very difficult quarter ahead:

Overall, we believe the company’s total year-over-year revenue deceleration during the December quarter compared to the September quarter for several reasons.

Although Apple is facing a tough currency blow, the view is very negative compared to the 8% rise in the share price after the release of fourth quarter results. The company expects to take a hit to Mac revenue as well as further weakness in services where recurring revenue was expected to justify the stock’s higher valuation multiple.

The market was likely excited about where sales growth might be without impacting currency rates, but the company is also benefiting from lower commodity prices in areas such as memory. However, the big advantage of catching up on supply constraints in the last two quarters is disappearing in the current quarter.

Disappearance of services

Just a few quarters ago, the Services group was the future of the business. Now services are struggling to grow with Q4 revenue only up 5%

The division recorded the slowest growth rate since the numbers were counted with some opinions that Apple would increase this category of recurring revenue to 20% annual clips. The quarterly numbers are now dropping sequentially after peaking at $19.8 billion in FQ2’22.

Table of services

Source: Six Colors

Apple just announced price increases for many services, a sign that the company is struggling to generate traction in the group. The company made the following price increases due to higher license fees:

Apple Music

  • Individual: $10.99 per month (from $9.99)
  • Family: $16.99 per month (from $14.99)
  • Annual Individual: $109 per year (from $99)

AppleTV+

  • Monthly: $6.99 per month (from $4.99)
  • Annual: $69 per year (from $49.99)

AppleOne

  • Individual: $16.95 per month (from $14.95)
  • Family: $22.95 per month (from $19.95)
  • Premier: $32.95 per month (from $29.95)

Average service is about $1 higher, but Apple TV+ service has jumped $2 per month, or 40%. The streaming service is one of the cheapest options out there, but viewers are increasingly in a rush to subscribe to all the different services at higher prices.

The results continue to suggest that Apple customers may be saturated with all the different services. Not to mention that a service like Apple Music isn’t necessarily a market leader like hardware products. CBS ranks Spotify (SPOT) as the best music streaming service with Apple Music as the best alternative option in some scenarios.

Slippage EPS estimates

Weak growth in services is another feather in the cap that calls into question why investors are so willing to pay a higher price for the stock. As highlighted and reinforced by the limited pace and rate of EPS growth in the fourth quarter, current analyst estimates are solid, if not too high.

Table of income estimates

Source: Alpha Research

The FY24 EPS target started the year at $6.88 and the current estimate is down to just $6.80. The stock is already trading at 23x FY24 EPS targets, which is only about 10% above actual EPS for the just-ended fiscal year. Apple is only expected to grow at an annualized rate of around 5%.

All the numbers continue to reinforce Apple has limited growth going forward. The stock is still valued for rapid growth and the reaction to fourth-quarter earnings bolsters the group of investors who are out of tune with the tech giant’s valuation.

Carry

The main investor takeaway is that Apple recovered from a decent FQ4 given the environment, but quarterly results weren’t good enough to justify the current valuation. Investors should again use the stock’s irrational rallies to offload stocks.

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