Consumer electronics giant Apple Inc. (AAPL) reported fiscal 2023 third-quarter earnings of $1.26 per share, beating Wall Street analysts’ estimate of $1.19 per share, while its revenue of $81.80 billion matched the consensus estimate. However, the company’s revenue fell 1.4% year-over-year, marking three consecutive quarters of declining sales.

Apple has been hurt by an industrywide slump that has weakened demand for phones, computers, and tablets. AAPL’s iPhone revenue was $39.70 billion for the quarter, nearly a 2% year-over-year decline. Its Mac revenue came in at $6.80 billion, a 7% drop from the corresponding quarter of 2022, while iPad revenue was down approximately 20%.

But services were a bright spot during the third quarter. Services revenue reached a new all-time high of $21.20 billion. The services business, which includes Apple Music and Apple TV+, is an increasingly important revenue drive for AAPL.

“We are happy to report that we had an all-time revenue record in 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,” said AAPL’s CEO Tim Cook.

On a call with analysts, Cook added, “We continue to face an uneven macroeconomic environment, including nearly four percentage points of foreign exchange headwinds.”

“Looking ahead, we’ll continue to manage for the long term, always pushing the limits of what’s possible and always putting the customer at the center of everything we do,” he added.

After reporting a revenue decline in the last reported quarter, Apple’s CFO Luca Maestri said on a conference call that investors could expect another drop in sales in the September quarter. An additional decline would mark the longest streak of declines in two decades.

However, the recent release of its new iPhone handsets could set the company on a growth path. On September 12, Apple unveiled the iPhone 15 lineup, including the iPhone 15, iPhone 15 Plus, iPhone 15 Pro and iPhone 15 Pro Max.

The new handsets feature a strong and lightweight titanium design with new contoured edges, a new Action button, powerful camera upgrades, and A16 Bionic/A17 Pro for next-level performance and mobile gaming.

Rosenblatt Securities recently downgraded AAPL’s stock to Neutral, citing a slowdown in iPhone sales and uncertainty in new product categories as major concerns.

Shares of AAPL have gained 8.3% over the past six months and 36.48% year-to-date to close the last trading session at $170.69. However, the stock plunged 4.8% over the past month. Moreover, Apple shares are heading for their worst month of 2023 so far.

Here’s what could influence AAPL’s performance in the upcoming months:

Positive Latest Developments

On September 12, AAPL announced a new AirPods Pro® (2nd generation) with USB-C charging capabilities. AirPods Pro (2nd generation) continues to revolutionize personal audio by delivering incredible sound quality, up to double the Active Noise Cancellation of their predecessor, an advanced Transparency mode, and an immersive Spatial Audio experience.

On the same day, the company unveiled the Apple Watch Ultra™ 2, bringing new features to Apple’s most capable and rugged smartwatch and achieving a significant environmental milestone.

Apple Watch Ultra 2 offers all the features users love about Ultra, coupled with the powerful new S9 SiP, a magical new double tap gesture, Apple’s brightest display ever, extended altitude range, on-device Siri®, Precision Finding for iPhone®, and advanced capabilities for water adventures. Such advancements in AAPL’s product portfolio should boost its growth and profitability.

Mixed Financials

AAPL’s net sales decreased 1.4% year-over-year to $81.80 billion during the third quarter that ended July 1, 2023. Its operating income was $23 billion, a marginal decline year-over-year. However, the company’s gross margin grew 1.5% from the year-ago value to $36.41 billion.

Furthermore, the company’s net income and earnings per share came in at $19.88 billion and $1.26, up 2.3% and 5% year-over-year, respectively. As of July 1, 2023, AAPL’s cash and cash equivalents were $28.41 billion, compared to $23.65 billion as of September 24, 2022.

Impressive Historical Growth

Over the past three years, AAPL’s revenue has grown at a CAGR of 11.9%. The company’s net income and EPS have increased at CAGRs of 17.5% and 21.8% over the same timeframe, respectively, while its EBITDA has grown at a CAGR of 16.4%.

Additionally, the company’s levered cash flow has increased at a CAGR of 20.2% over the past three years.

Mixed Analyst Estimates

Street expects AAPL’s revenue to decline 1% year-over-year to $88.29 billion for the fourth quarter (ending September 2023). However, the consensus earnings per share estimate of $1.39 for the current quarter indicates a 7.5% year-over-year improvement. Also, the company has topped the consensus EPS estimates in three of the trailing four quarters.

In addition, analysts expect AAPL’s revenue and EPS for the current fiscal year 2023 to decrease 2.8% and 0.7% from the previous year to $383.30 billion and $6.07, respectively. The company’s revenue and EPS for fiscal year 2024 are expected to grow 5.9% and 8.2% year-over-year to $405.92 billion and $6.57, respectively.

High Profitability

AAPL’s trailing-12-month EBITDA margin of 32.29% is 252.8% higher than the 9.15% industry average. Likewise, the stock’s trailing-12-month net income margin of 24.68% is significantly higher than the industry average of 2.03%. Also, its trailing-12-month levered FCF margin of 23.62% is 226.5% higher than the 7.24% industry average.

Moreover, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 160.09%, 40.39%, and 28.28% compare favorably to the industry averages of 1.01%, 2.13%, and negative 0.04%, respectively.

Elevated Valuation

In terms of forward non-GAAP P/E, AAPL is currently trading at 28.14x, 28.3% higher than the industry average of 21.93x. The stock’s forward EV/Sales of 6.81x is 159.5% higher than the industry average of 2.63x. Also, its forward EV/EBITDA multiple of 20.82 is 51.3% higher than the industry average of 13.76.

In addition, the stock’s forward Price/Sales and Price/Cash Flow of 6.96x and 23.23x compare unfavorably to the respective industry averages of 2.59x and 20.10x.

POWR Ratings Reflect Uncertainty

AAPL’s mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AAPL has an A grade for Quality, in sync with higher-than-industry profitability.

In addition, the stock has a C grade for Sentiment, consistent with its mixed analyst expectations.

On the other hand, the stock has a D grade for Value, consistent with its higher valuation relative to its industry peers.

AAPL is ranked #23 out of 42 stocks in the Technology - Hardware industry.

Beyond what I have stated above, we have also given AAPL grades for Stability, Growth, and Momentum. Get all AAPL’s POWR Ratings here.

Bottom Line

AAPL beat analyst expectations for earnings and matched the consensus estimate for revenue in the last reported quarter. While services revenue reached a new all-time high, the company witnessed its third consecutive quarter of declining revenues, its prolonged sales slump since 2016.

Further, the company predicted sales slump to continue in the fourth quarter of fiscal 2023.

While the tech giant’s long-term prospects appear promising, driven by its innovative product lineups and market dominance, its near-term performance will likely be affected by eroding consumer spending amid inflationary pressures.

Given its declining revenue, stretched valuation, and near-term bleak outlook, it could be wise for investors to hold AAPL and wait for a better entry point in this stock.

Stocks to Consider Instead of Apple Inc. (AAPL)

Given its uncertain short-term prospects, the odds of AAPL outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Technology - Hardware industry instead:

Panasonic Holdings Corporation (PCRFY)

Canon Inc. (CAJ)

Daktronics, Inc. (DAKT)

To explore more A and B-rated hardware stocks, click here.

What To Do Next?

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AAPL shares rose $1.86 (+1.09%) in premarket trading Friday. Year-to-date, AAPL has gained 33.46%, versus a 14.06% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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