Apple (NASDAQ:AAPL) has consistently proven to be a lucrative investment for shareholders, boasting a track record of innovation and product excellence. The tech giant, headquartered in Cupertino, has introduced groundbreaking devices such as the iPhone, iPad, Apple Watch, Macbook, and services like Apple Music and Apple Pay, reshaping the way we engage with technology. In August 2018, Apple became the first U.S. company to achieve a market capitalization of a trillion dollars.
In the current year, Apple’s stock has surged by 38%, outperforming the S&P 500’s rise of 16.7% and the Nasdaq’s 31% surge.
However, Apple (NASDAQ:AAPL) faced a setback after its latest quarterly report indicated a slowdown in iPhone demand, leading to a sharp drop in stock prices post-earnings. The stock has yet to recover from this bearish trend.
With the shares trading close to their lowest point in two months, the question emerges: Is now a suitable time to invest in Apple, taking advantage of the post-earnings decline, or is it advisable to exercise caution?
Quarterly Performance and Prospects
Apple’s (NASDAQ:AAPL) fiscal Q3 results exceeded expectations, although concerns emerged about a potential revenue deceleration extending into Q4. Total net sales for the quarter reached $81.8 billion, showing a 1.4% decline from the previous year but surpassing the consensus estimate of $81.69 billion. Earnings per share (EPS) grew by 5% compared to the previous year, reaching $1.26, surpassing the estimated $1.19.
Notably, product sales for the quarter amounted to $60.6 billion, marking a 4.4% decrease from the previous year. iPhone sales were down by 2.5% year-over-year, amounting to $39.7 billion in the quarter, falling short of the anticipated $39.91 billion.
Apple’s (NASDAQ:AAPL) revenue trends have typically followed a cyclical pattern, with sales peaking in the September and December quarters and then tapering off throughout the rest of the year. This pattern is driven by new iPhone releases and the holiday season. However, Apple added to its iPhone sales challenge by projecting another year-over-year revenue decline for the upcoming September quarter.
The decline in iPhone sales, which still contributes nearly half of the company’s total quarterly net sales, can be attributed to two factors. Firstly, changing spending habits due to higher inflation and interest rates have diverted potential customers away from discretionary purchases like smartphones in 2023. Secondly, the anticipated launch of the new iPhone 15 models in September might have led customers to postpone their purchases during the quarter, causing a more pronounced impact.
Notably, sales in the U.S. market, Apple’s largest revenue contributor, decreased by 5.6% from the previous year to $35.4 billion. Sales in the Asia Pacific segment, encompassing India and considered a pivotal growth market, declined by 8% to $5.6 billion.
While Apple’s operating cash generation for the nine-month period dropped by 9.3% from the previous year to $88.9 billion, its service revenue offered a bright spot. Service net sales witnessed an 8.2% growth from the previous year, reaching $21.2 billion, exceeding the expected $20.76 billion.
Valuation and Competitors
Comparatively, Apple (NASDAQ:AAPL) appears relatively overvalued in the realm of personal computing when contrasted with peers. Currently, Apple holds forward price-to-earnings (p/e), price-to-sales (p/s), and price-to-cash flow (p/cf) ratios of 29.37, 7.34, and 24.58, respectively. These figures significantly surpass those of Dell (NYSE:DELL) with ratios of 19.22, 0.43, and 7.37, and HP (NYSE:HPQ) with ratios of 11.04, 0.58, and 11.07.
In the realm of smartphones and mobile operating systems, Alphabet (NASDAQ:GOOGL) emerges as a major competitor to Apple. Comparatively, Apple’s valuations appear higher. Alphabet’s forward p/e, p/s, and p/cf ratios stand at 23.17, 5.75, and 16.51.
Analyst Projections
Analysts foresee a 6.2% growth in Apple’s earnings for the current quarter and a 9.04% growth in the subsequent quarter. After a 0.98% decline in earnings for the fiscal year 2023, a return to 8.93% growth is projected for fiscal 2024.
The consensus among analysts is cautiously optimistic toward Apple stock. The overall rating stands at Moderate Buy, with a mean target price of $205.07, indicating a potential upside of approximately 14%. Out of 29 analysts covering the stock, 18 rates it as a Strong Buy, 3 as a Moderate Buy, and 8 as a Hold.
Final Assessment
Apple has played a pivotal role in transforming the consumer tech landscape, catalyzing shifts in how people interact with technology through its innovations. While the company commands premium prices for its products, the value they bring has consistently outweighed any downsides for many loyal customers.
Nevertheless, Apple’s recent pace of product innovation has slowed. The introduction of the mixed-reality headset, the Vision Pro, announced in June 2023, represents the company’s first significant new product in a considerable period. The adoption of this headset, expected in early 2024, could take time due to its price and the emerging nature of the metaverse space.
Considering the decline in iPhone sales, high valuations, and ongoing economic challenges, prudence suggests caution in adding Apple to a portfolio at current levels. However, Apple’s innovation-driven DNA positions it as a promising long-term investment, potentially propelling its stock to new heights. Consequently, it might be advisable for investors to wait until AAPL further retreats and then consider an averaging-down investment approach.
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Author Faith Yakubu