Why Apple Is Poised For A Tough Holiday Quarter

Apple (NASDAQ:AAPL) is slated to report its Q1 FY’23 results on February 2, reporting on a quarter that saw the company contend with supply chain headwinds for its flagship iPhones. We estimate that Apple’s revenue will come in at about $123 billion for the quarter, marginally ahead of consensus estimates, although this would mark a slight year-over-year decline. We estimate that earnings will stand at close to $1.99 per share, compared to a consensus of $1.97 per share. So what are some of the trends that are likely to drive Apple’s results? See our interactive dashboard analysis on Apple Earnings Preview for more details on how Apple’s revenues and earnings are likely to trend for the quarter.

Sales of Apple’s new iPhone 14 are likely to be the biggest driver of the company’s Q1 results. However, the more popular iPhone Pro models witnessed shortages through the holidays due to Covid-19-related issues in China and protests at contract manufacturer Foxconn’s factory in Zhengzhou. Demand for Apple’s Mac and iPads is also likely to have cooled versus last year, as the remote working and learning trend seen through the Covid-19 pandemic eases. However, Apple’s focus on pricier devices such as the iPad Pros, and upgraded Macbook Air, could help to offset the demand headwinds to an extent. We will be closely watching the performance of Apple’s services business over the quarter. Services sales have cooled off considerably in recent quarters. Over Q4 FY’22, the division grew by just 5%, compared to double-digit levels in previous quarters, and also below overall Apple Revenue growth which stood at 8% last quarter. This is concerning, given that services are very lucrative, with segment gross margins standing at over 70%.

At the current market price of $136 per share, Apple stock trades at just over 22x forward earnings, which we believe is reasonable given the company’s earnings growth prospects, and solid balance sheet. Apple should also handle a potential economic downturn better than its tech peers given its ecosystem lock-in, the high desirability of its products, and the ability to upsell to existing customers. We continue to remain bullish on Apple stock, with a $166 price estimate which is about 24% ahead of the current market price. See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

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