Apple earnings hit rough patch, can buybacks save the day? – Stock Market News
April 27, 2023 7:28 am
Apple will release its earnings report on Thursday, May 4, after Wall Street’s closing bell. Earnings and sales are projected to have declined for a second quarter as struggling consumers seem reluctant to upgrade their devices. An expansion of the buyback program might be a saving grace for Apple shares, but with the valuation still so expensive, it’s difficult to be optimistic overall.
Pandemic hangover
The world’s most valuable company encountered some turbulence lately. Sales of Apple products and corporate profits have started to decline from one year ago, with CEO Tim Cook laying the blame mostly on a “challenging macroeconomic environment”.
This is a euphemism for saying demand is losing steam. Following a huge boom for Apple devices during the pandemic, demand has plateaued in recent quarters as the cost of living crisis took a bite out of consumers’ wallets. Many people have simply decided to wait before upgrading their products, especially when it comes to high-cost items.
In an attempt to deal with this issue and regain momentum, Apple is seeking opportunities in new markets. It recently introduced its ‘buy now, pay later’ service, alongside a savings account that offers Apple card holders a 4.15% interest rate. A virtual reality headset is also in the pipeline, and there are several reports that an Apple car is in design.
Another ugly quarter
While all these new offerings can juice up Apple’s profits, they probably won’t come into play for a few years, at least not in a significant enough manner to move the needle for such a massive company. For now, the upcoming earnings report could be problematic.
In the first quarter of 2023, analysts expect Apple’s earnings to have declined by 5.7% from the same quarter last year. Revenue is anticipated to have dropped by 4.4% over the same period. Most of this weakness is being driven by falling sales for iPads and Macs.
While these declines don’t sound very scary, it’s crucial to remember these numbers are not adjusted for inflation. Once you account for an inflation rate around 5%, the ‘real’ drop in sales and profits is much heavier.
In the markets, what usually happens is that estimates by analysts are set so low ahead of the event that Apple manages to beat them. The company has overcome earnings forecasts in seven of the last eight quarters. It’s a case of ‘jumping over a low bar’.
If something similar plays out this time, Apple shares could rally towards their recent high near 168.00, especially if management also announces an increase in its share buyback program that stood at $90 billion last year. This is the amount of money the company spends on repurchasing its own shares, so a higher number would benefit the stock.
On the contrary, a batch of surprisingly weak earnings numbers or an underwhelming buyback announcement could catch traders by surprise, potentially pushing Apple shares down towards the 160.00 zone.
Valuation is pricey
From a valuation perspective, Apple shares seem quite expensive. The stock is trading at 25.9 times what analysts estimate earnings will be over the coming year, which is really high considering that earnings are on the decline.
Over the past decade, Apple usually traded below 20 times earnings, so the stock currently appears expensive relative to its historical valuation. This suggests there might not be much upside left for shares, until earnings begin to grow again.
Make no mistake, Apple is a great company with a loyal customer base and a serious technological moat. However, it is currently going through a soft patch, yet its shares are almost priced for perfection, making it difficult to be optimistic in the short run.
Apple will release its earnings report on Thursday, May 4, after Wall Street’s closing bell. Earnings and sales are projected to have declined for a second quarter as struggling consumers seem reluctant to upgrade their devices. An expansion of the buyback program might be a saving grace for Apple shares, but with the valuation still so expensive, it’s difficult to be optimistic overall.
Pandemic hangover
The world’s most valuable company encountered some turbulence lately. Sales of Apple products and corporate profits have started to decline from one year ago, with CEO Tim Cook laying the blame mostly on a “challenging macroeconomic environment”.
This is a euphemism for saying demand is losing steam. Following a huge boom for Apple devices during the pandemic, demand has plateaued in recent quarters as the cost of living crisis took a bite out of consumers’ wallets. Many people have simply decided to wait before upgrading their products, especially when it comes to high-cost items.
In an attempt to deal with this issue and regain momentum, Apple is seeking opportunities in new markets. It recently introduced its ‘buy now, pay later’ service, alongside a savings account that offers Apple card holders a 4.15% interest rate. A virtual reality headset is also in the pipeline, and there are several reports that an Apple car is in design.
Another ugly quarter
While all these new offerings can juice up Apple’s profits, they probably won’t come into play for a few years, at least not in a significant enough manner to move the needle for such a massive company. For now, the upcoming earnings report could be problematic.
In the first quarter of 2023, analysts expect Apple’s earnings to have declined by 5.7% from the same quarter last year. Revenue is anticipated to have dropped by 4.4% over the same period. Most of this weakness is being driven by falling sales for iPads and Macs.
While these declines don’t sound very scary, it’s crucial to remember these numbers are not adjusted for inflation. Once you account for an inflation rate around 5%, the ‘real’ drop in sales and profits is much heavier.
If something similar plays out this time, Apple shares could rally towards their recent high near 168.00, especially if management also announces an increase in its share buyback program that stood at $90 billion last year. This is the amount of money the company spends on repurchasing its own shares, so a higher number would benefit the stock.
On the contrary, a batch of surprisingly weak earnings numbers or an underwhelming buyback announcement could catch traders by surprise, potentially pushing Apple shares down towards the 160.00 zone.
Valuation is pricey
From a valuation perspective, Apple shares seem quite expensive. The stock is trading at 25.9 times what analysts estimate earnings will be over the coming year, which is really high considering that earnings are on the decline.
Over the past decade, Apple usually traded below 20 times earnings, so the stock currently appears expensive relative to its historical valuation. This suggests there might not be much upside left for shares, until earnings begin to grow again.
Make no mistake, Apple is a great company with a loyal customer base and a serious technological moat. However, it is currently going through a soft patch, yet its shares are almost priced for perfection, making it difficult to be optimistic in the short run.
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