Should Investors Worry About Apple’s Slowing Services Business?
Apple (NASDAQ:AAPL) published a better than expected set of Q3 FY’22 results, with Apple revenues coming in at $83 billion and earnings standing at $1.20 per share. However, the results mark a considerable slowdown compared to last year, with revenue growing by just 2% year-over-year with EPS also falling 7% versus the prior year due to rising operating expenses. There are multiple factors weighing on Apple’s financial performance, including the strong U.S. dollar and continuing supply chain issues, which Apple estimates hit revenue by $4 billion to $8 billion over the quarter. Moreover, the macroeconomic environment also remains tough, with U.S. GDP contracting over the last two quarters, and surging inflation eating into household budgets. Apple’s iPhone sales grew by just about 3% to $40.7 billion, and its services segment expanded by just about 12%, down from about 27% growth in the year-ago quarter, while marking the slowest quarter of growth in about six years. Apple’s iPad, Mac, and other product segments all saw revenue contract on a year-over-year basis. That said, Apple’s gross margins held up, coming in at 43.3%, roughly flat compared to last year.
Although the macro environment is likely to remain tough in the near term, Apple actually expects its year-over-year revenue growth to pick up during the September quarter versus June, as supply-related constraints are likely to ease. However, gross margins are expected to see some pressure, with the company projecting margins of between 41.5% and 42.5% due to continued currency headwinds and a weaker product mix. Apple also expects slower growth from its high-margin services business, as areas such as digital advertising see slower growth due to the economic slowdown. That said, we think this business should eventually pick up, as the economy improves and also considering that Apple is seeing a record number of people switching to its ecosystem from other platforms. Moreover, Apple has also grown its base of paid subscriptions considerably to 860 million , up 160 million over the last year and this should also drive services revenues going forward.
We are maintaining our $178 per share price estimate for Apple stock, which marks a premium of about 13% over the current market price. See our analysis on Apple Valuation: Is AAPL Stock Expensive Or Cheap? for an overview of what’s driving our price estimate for Apple.
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