Apple braces for a mixed bag of earnings – Stock Markets
October 31, 2023 3:28 pm
Apple reports Q3 financial results on Thursday after closing bell
Revenue expected to contract but earnings will pick up
Share price fell below 200-day SMA for the first time since March
Solid year but financials lag
The most valuable publicly traded company in the world has been exhibiting a strong performance in 2023, with its share price moving in lockstep with the Nasdaq 100 despite the firm’s deteriorating financials. Apple’s revenue has been falling for three consecutive quarters and the streak is anticipated to resume in the examined one, which is not something common for the tech behemoth.
Given that the firm has had the pricing power to hike prices as inflation remains well above central banks’ target in 2023, its declining revenue reveals that the sales of Apple’s iconic products have been losing steam. This weakness has been largely attributed to the macroeconomic backdrop as in an effort to tackle the increasing cost of life, consumers have curtailed spending on high-cost discretionary items.
Last week, Microsoft earnings revealed some strength in the sales of personal computing and other hardware products, providing a positive early indication for Apple, which among the tech clan is the most consumer centric.
Quarter highlights
Apple launched its new model, iPhone 15, in September, thus this earnings report will provide an early assessment of how its demand is faring against previous series. Apart from the overall performance of Apple’s products, markets will be laser-focused on the firm’s sales in China amid the ongoing US-China tech war.
The Chinese government has already urged consumers to shift to domestic tech firms such as Huawei, depriving Apple from a huge market that accounts for around 20% of the firm’s total revenue. Meanwhile, the raging US dollar continues to devalue the firm’s income earned overseas.
In contrast to other major tech companies, Apple has been characterised by its unwillingness to enter the Artificial Intelligence (AI) race despite the latter being 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 Q3 numbers.
Mixed financials
Apple’s Q3 earnings are expected to reflect its post-pandemic pricing strategy, defending its profit margins at the expense of slowing sales growth. The tech giant is forecast to report revenue of $89.28 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year decline of 1% and mark its fourth consecutive negative quarter. The decline in revenue is mostly attributed to the sales of Macs and iPads, which are expected to be down 25.30% and 15.33%, respectively.
However, earnings per share (EPS) are estimated to climb to $1.39, producing an increase of 7.87% on an annual basis. As mentioned earlier, the gross profit margin is anticipated to widen by 2.23% to 44.49% on annual terms.
Asymmetric risks due to high valuation
From a valuation perspective, Apple appears to be trading with a premium against major benchmarks despite its poor fundamentals in 2023. On the one hand, investors might be confident that the global economy could manage to avoid a recession, thus demand for discretionary items could reaccelerate soon. Of course, Apple would be able to capitalize on that given its loyal customer base and premium pricing strategy.
Nevertheless, as the global economy is bracing for a protracted period of high interest rates and sticky inflation, this scenario seems highly unlikely for now. Considering that Apple has not laid out any AI plans or other diversification efforts, it is difficult to justify its stretched valuation.
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 25.8x. This ratio is not only way higher than S&P 500’s 18.1x but also far exceeds the tech-heavy Nasdaq’s 25.0x.
Stock dives to a 6-month low
From a technical standpoint, Apple’s stock has been in a clear short-term decline, dropping to its lowest levels since early May, while trading beneath the 200-day simple moving average (SMA) for the first time since early March.
Should earnings surprise to the upside, the stock could reclaim the 200-day SMA and ascend towards the October support of $172.00, which could serve as resistance in the future. Failing to halt there, the price might then test the October peak of $182.30.
On the flipside, disappointing financial results may send the price to revisit its recent six-month bottom of $165.50. A violation of the latter could trigger a retreat towards the $157.50 hurdle.
Apple reports Q3 financial results on Thursday after closing bell
Revenue expected to contract but earnings will pick up
Share price fell below 200-day SMA for the first time since March
Solid year but financials lag
The most valuable publicly traded company in the world has been exhibiting a strong performance in 2023, with its share price moving in lockstep with the Nasdaq 100 despite the firm’s deteriorating financials. Apple’s revenue has been falling for three consecutive quarters and the streak is anticipated to resume in the examined one, which is not something common for the tech behemoth.
Given that the firm has had the pricing power to hike prices as inflation remains well above central banks’ target in 2023, its declining revenue reveals that the sales of Apple’s iconic products have been losing steam. This weakness has been largely attributed to the macroeconomic backdrop as in an effort to tackle the increasing cost of life, consumers have curtailed spending on high-cost discretionary items.
Last week, Microsoft earnings revealed some strength in the sales of personal computing and other hardware products, providing a positive early indication for Apple, which among the tech clan is the most consumer centric.
Quarter highlights
Apple launched its new model, iPhone 15, in September, thus this earnings report will provide an early assessment of how its demand is faring against previous series. Apart from the overall performance of Apple’s products, markets will be laser-focused on the firm’s sales in China amid the ongoing US-China tech war.
The Chinese government has already urged consumers to shift to domestic tech firms such as Huawei, depriving Apple from a huge market that accounts for around 20% of the firm’s total revenue. Meanwhile, the raging US dollar continues to devalue the firm’s income earned overseas.
In contrast to other major tech companies, Apple has been characterised by its unwillingness to enter the Artificial Intelligence (AI) race despite the latter being 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 Q3 numbers.
Mixed financials
Apple’s Q3 earnings are expected to reflect its post-pandemic pricing strategy, defending its profit margins at the expense of slowing sales growth. The tech giant is forecast to report revenue of $89.28 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year decline of 1% and mark its fourth consecutive negative quarter. The decline in revenue is mostly attributed to the sales of Macs and iPads, which are expected to be down 25.30% and 15.33%, respectively.
However, earnings per share (EPS) are estimated to climb to $1.39, producing an increase of 7.87% on an annual basis. As mentioned earlier, the gross profit margin is anticipated to widen by 2.23% to 44.49% on annual terms.
Asymmetric risks due to high valuation
From a valuation perspective, Apple appears to be trading with a premium against major benchmarks despite its poor fundamentals in 2023. On the one hand, investors might be confident that the global economy could manage to avoid a recession, thus demand for discretionary items could reaccelerate soon. Of course, Apple would be able to capitalize on that given its loyal customer base and premium pricing strategy.
Nevertheless, as the global economy is bracing for a protracted period of high interest rates and sticky inflation, this scenario seems highly unlikely for now. Considering that Apple has not laid out any AI plans or other diversification efforts, it is difficult to justify its stretched valuation.
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 25.8x. This ratio is not only way higher than S&P 500’s 18.1x but also far exceeds the tech-heavy Nasdaq’s 25.0x.
Stock dives to a 6-month low
From a technical standpoint, Apple’s stock has been in a clear short-term decline, dropping to its lowest levels since early May, while trading beneath the 200-day simple moving average (SMA) for the first time since early March.
Should earnings surprise to the upside, the stock could reclaim the 200-day SMA and ascend towards the October support of $172.00, which could serve as resistance in the future. Failing to halt there, the price might then test the October peak of $182.30.
On the flipside, disappointing financial results may send the price to revisit its recent six-month bottom of $165.50. A violation of the latter could trigger a retreat towards the $157.50 hurdle.
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