Apple Q2 Earnings: Divergence between fundamentals and share price – Stock Markets
August 1, 2023 3:28 pm
Apple will unveil its second quarter financial results on Thursday, August 3, after Wall Street’s closing bell. Earnings and revenue figures are expected to have contracted on an annual basis as consumer demand seems to be fading across the globe. However, Apple’s stock has been in a relentless rally since the beginning of the year, posting consecutive fresh all-time highs and pushing its valuation towards expensive territories.
Huge divergence
The most valuable publicly traded company in the world has exhibited stellar performance in 2023 but its financials do not justify this outperformance. Sales of Apple’s iconic products have been losing steam during the last two quarters and the streak is anticipated to resume in the examined one.
This weakness is largely attributed to the softening consumer demand as inflation remains well above central banks’ target levels, while the pandemic stimulus checks have evaporated. In this macroeconomic backdrop, it is reasonable for the inflation-squeezed consumer to play defence by curtailing spending on high-cost discretionary items.
Last week, Microsoft earnings revealed some weakness in sales of hardware and other electronics, providing a negative early indication for Apple, which relies heavily on the sales of its consumer products. Of course, Apple acknowledged that there are tough times coming ahead and has already notified suppliers to keep iPhone shipments flat on fears that excess supply could apply downside pressures on prices.
Highlights
Something that substantially differentiates Apple from the rest of the tech clan so far in the year is its unwillingness to enter the Artificial Intelligence (AI) race, which has been the main catalyst behind the latest bull market. With this ace up its sleeves, investors should not rule out the announcement of any AI or even cloud-related initiative from Apple to mask any fragility in its Q2 numbers.
Regarding future prospects, market participants will probably keep a close eye on the guidance for the September quarter when the launch of iPhone 15 is expected to resurge sales and earnings growth. Besides that, attention is also likely to fall on any commentary about the new Vision Pro headset. Even though it is considered one of the firm’s most important growth levers and has been a clear catalyst for the stock’s 2023 gains, it is not projected to deliver any material results until 2024.
Ugly quarter but there is room for surprises
Apple will probably exhibit stagnant earnings for a third consecutive quarter amid a constantly deteriorating demand outlook for its products. The tech giant is forecast to report revenue of $81.63 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year decline of 1.59%. Earnings per share (EPS) are estimated to drop to $1.19, producing a minor decrease of 0.55% on an annual basis.
In the past, Apple has often surprised investors by announcing unexpected increases in its share buyback programs. Hence, as its cash reserves still enable the firm to proceed with such moves, there is a possibility that this could happen in the upcoming earnings call to distract markets from any weakness in its figures.
Asymmetric risks due to high valuation
From a valuation perspective, Apple appears to be trading with a premium against major benchmarks, which could have two different interpretations. On the one hand, investors might be confident that the global economy could manage to avoid a recession, thus demand for discretionary items could rebound faster than initially expected. Nevertheless, it may also be argued that the latest barrage of multi-year highs has sent the share price to overvalued territories, opening the door for a moderate downside if earnings do not begin to grow.
Apple’s 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 30.3x. This ratio is not only way higher than S&P 500’s 19.8x but also far exceeds the tech-heavy Nasdaq’s 28.9x.
Where will the rally stop?
Apple’s stock has been in a sustained uptrend since the beginning of the year, posting consecutive record highs. The big question is: where willthis exponential advance eventually come to a halt?
Should earnings surprise to the upside, the stock could ascend towards $205.54, which is the 138.2% Fibonacci extension of the 183.07-124.26 downleg. Failing to halt there, the price might then test the 150.0% Fibo of $212.48.
On the flipside, disappointing financial results may send the price below the ascending trendline taken from early January, where the 2022 high of $183.07 could now serve as support. A violation of the latter could trigger a retreat towards the 78.6% Fibo of 170.48.
Apple will unveil its second quarter financial results on Thursday, August 3, after Wall Street’s closing bell. Earnings and revenue figures are expected to have contracted on an annual basis as consumer demand seems to be fading across the globe. However, Apple’s stock has been in a relentless rally since the beginning of the year, posting consecutive fresh all-time highs and pushing its valuation towards expensive territories.
Huge divergence
The most valuable publicly traded company in the world has exhibited stellar performance in 2023 but its financials do not justify this outperformance. Sales of Apple’s iconic products have been losing steam during the last two quarters and the streak is anticipated to resume in the examined one.
This weakness is largely attributed to the softening consumer demand as inflation remains well above central banks’ target levels, while the pandemic stimulus checks have evaporated. In this macroeconomic backdrop, it is reasonable for the inflation-squeezed consumer to play defence by curtailing spending on high-cost discretionary items.
Last week, Microsoft earnings revealed some weakness in sales of hardware and other electronics, providing a negative early indication for Apple, which relies heavily on the sales of its consumer products. Of course, Apple acknowledged that there are tough times coming ahead and has already notified suppliers to keep iPhone shipments flat on fears that excess supply could apply downside pressures on prices.
Highlights
Something that substantially differentiates Apple from the rest of the tech clan so far in the year is its unwillingness to enter the Artificial Intelligence (AI) race, which has been the main catalyst behind the latest bull market. With this ace up its sleeves, investors should not rule out the announcement of any AI or even cloud-related initiative from Apple to mask any fragility in its Q2 numbers.
Regarding future prospects, market participants will probably keep a close eye on the guidance for the September quarter when the launch of iPhone 15 is expected to resurge sales and earnings growth. Besides that, attention is also likely to fall on any commentary about the new Vision Pro headset. Even though it is considered one of the firm’s most important growth levers and has been a clear catalyst for the stock’s 2023 gains, it is not projected to deliver any material results until 2024.
Ugly quarter but there is room for surprises
Apple will probably exhibit stagnant earnings for a third consecutive quarter amid a constantly deteriorating demand outlook for its products. The tech giant is forecast to report revenue of $81.63 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year decline of 1.59%. Earnings per share (EPS) are estimated to drop to $1.19, producing a minor decrease of 0.55% on an annual basis.
In the past, Apple has often surprised investors by announcing unexpected increases in its share buyback programs. Hence, as its cash reserves still enable the firm to proceed with such moves, there is a possibility that this could happen in the upcoming earnings call to distract markets from any weakness in its figures.
Asymmetric risks due to high valuation
From a valuation perspective, Apple appears to be trading with a premium against major benchmarks, which could have two different interpretations. On the one hand, investors might be confident that the global economy could manage to avoid a recession, thus demand for discretionary items could rebound faster than initially expected. Nevertheless, it may also be argued that the latest barrage of multi-year highs has sent the share price to overvalued territories, opening the door for a moderate downside if earnings do not begin to grow.
Apple’s 12-month forward price-to-earnings ratio, which denotes the dollar amount someone would need to invest to receive back one dollar in annual earnings, currently stands at 30.3x. This ratio is not only way higher than S&P 500’s 19.8x but also far exceeds the tech-heavy Nasdaq’s 28.9x.
Where will the rally stop?
Apple’s stock has been in a sustained uptrend since the beginning of the year, posting consecutive record highs. The big question is: where will this exponential advance eventually come to a halt?
Should earnings surprise to the upside, the stock could ascend towards $205.54, which is the 138.2% Fibonacci extension of the 183.07-124.26 downleg. Failing to halt there, the price might then test the 150.0% Fibo of $212.48.
On the flipside, disappointing financial results may send the price below the ascending trendline taken from early January, where the 2022 high of $183.07 could now serve as support. A violation of the latter could trigger a retreat towards the 78.6% Fibo of 170.48.
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