After industry giants like Meta and Google delivered tantalizing quarterly reports, a lot of focus was placed on Apple Inc. (NASDAQ: AAPL) as they released their latest quarterly statement after the bell on Thursday. While revenue was in line and earnings topped estimates, the report was slightly disappointing compared to those of their peers. As a result, investors took a bite out of Apple’s sweet share price, forcing a 2% after-market contraction.
Apple reported earnings per share (EPS) of $1.20 for their third quarter, slightly up from the $1.20 in the year-ago period, while preventing the forecasted decline to $1.19. Revenue, on the other hand, aligned with consensus at $81.8Bn, lagging behind the $82.96Bn generated in the same quarter last year. A slowdown in revenue was expected, as continuous headwinds in the hardware segment weigh on their operations. However, optimism in the services sector slightly offset the hardware decline, but not enough to entice investors in sending the share price higher, as some profit-taking took place at the highs formed from the significant year-to-date rally.
Technical
On the 1D chart, the longstanding uptrend is finally at risk of a sustainable breakdown. The dynamic support failed, with the share price approaching the 50-day moving average at $186.88. A breakdown at this level could confirm the pullback, with lower support established at $183.34.
If the selloff from the earnings leaves the late July high as a peak, the share price could retrace toward the 23.6% Fibonacci retracement of $180.28 in the upcoming sessions. From there, lower support is established at $176.77 before the 38.2% Fibonacci retracement comes into play at $169.68.
These could all be potential levels of interest for a bullish investor, as the estimated fair value of the stock lies at $203.65. If the 50-day moving average support holds, a breakout above resistance at $197.26 could see the uptrend continue, with a 6.5% potential upside from current levels.
Fundamental
While Apple’s 47.13% year-to-date performance has failed to keep up with the stunning momentum of Meta (160.25%), the company has proven its financial strength over long periods of time. The graph below highlights their dominance in the technology space, as they have returned 268.72% over a five-year time horizon. This is double the return of the broader Nasdaq 100 (108.26%) and their industry peers, Alphabet (106.99%) and Meta (77.58%). This shows that while they have participated in the YTD technology rally, they have proven themselves over more extended periods as well, making investors feel more at ease over the sustainability of this upturn. However, it is bittersweet for Apple as things stand since their strong share price performance over the last few years has made them more vulnerable to a potential pullback, as investors and traders could be looking for profit-taking opportunities. Their latest earnings report and a slowdown in sales could be one of those opportunities the market has been waiting for.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
The concern becomes evident below when analyzing the company’s year-over-year top-line growth over the last few quarters. Leading up to its Q3 report, the company had already suffered two consecutive quarters of negative earnings growth, with its latest report making it three in a row. As a result, net income growth has also fallen into negative territory for the last two quarters, as the continuous headwinds faced in the product segment are capping their revenue upside potential.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
The separation between the top-line growth of Apple and other technology companies that have posted stellar top-line figures this earnings season is the nature of their revenue. Apple relies a lot more on hardware sales, such as iPhones and Mac sales, compared to the advertising revenue that other peers focus on. In the latest quarter, iPhone sales fell from $40.67Bn to $39.7Bn. Similarly, Mac sales contracted from $7.38Bn to $6.84Bn, while iPad revenue fell from $7.22Bn to $5.79Bn. The product segment that performed the best was Wearables, Home, and Accessories, which bucked the trend to increase from $8.08Bn to $8.28Bn. However, their services sector blew hardware out of the park, growing from $19.60Bn to $21.21Bn. This represented an all-time high for the segment, as their total number of subscriptions grew to over 1Bn. The graph below signals their increased reliance on the services segment, which is expanding its attribution to total revenue more and more each quarter. In the latest quarter, 26% of the company’s revenue was generated through services.
Source: FairMarkets Australia – Apple,Inc., Tiaan van Aswegen
Despite its slumping top-line performance, Apple has maintained healthy profitability metrics. The graph below compares the margins of Apple with Google and Meta. While the gross margin of 44.26% lags behind its peers, its higher cost of goods sold from the hardware segment allows for a bit of leeway. Upon closer inspection, their services segment has a gross profit margin of 71%, while their products segment operates with a much lower gross margin of 35%. Therefore, as their services start attributing more to their top line, their margins should also start expanding to close the gap. However, with all expenses considered, their net income margin (25.48%) remains an industry leader, even though Apple did not engage in heavy headcount reductions, as was the trend in the technology sector earlier in the year.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
From a valuation perspective, Apple does look a bit stretched, as most of their relative multiples trade higher than industry peers. On a price/free cash flow basis, they fall within the industry range at 31X. Still, the company seems relatively overvalued on an EV/EBITDA (21.1X) and P/S (7.9X), which explains the investor reaction to their latest earnings report. While there are growth prospects that could provide tailwinds as we advance, including the release of their new iPhone 15 in September, and progress being made by integrating their products and service into emerging markets like India, investors will likely want to see a reversal in their revenue growth trend in the products segment to convince them of buying in at current valuations.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
Summary
Despite reaching record revenues in their Services segment, continuous headwinds in their product segment have capped their top line’s upside potential. However, the company still produces a staggering amount of revenue while producing competitive profitability metrics. If they can have a turnaround in their iPhone sales boosted by the new release of the iPhone 15 later this year, we could see optimism return to the technology giant. With an estimated fair value of $203.65, there is a 6.5% potential upside from current levels for bullish investors.
Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, Apple, Inc.
