How Will Apple’s Earnings Trend As iDevice Sales Slow

Apple (NASDAQ:AAPL) is slated to report its Q2 FY’23 results on May 4, reporting on a quarter that likely saw the company’s sales contract amid weaker demand for computing devices and headwinds in the digital services business.  We estimate that Apple’s revenue will come in at about $93 billion for the quarter, roughly in line with consensus estimates and about 4% lower compared to last year. We estimate that earnings will stand at close to $1.45 per share, compared to a consensus of $1.43 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.

We expect to see slower sales of iPhones, amid economic concerns and weaker consumer spending. However, this could be partially offset by improved availability of the flagship iPhone Pro devices, which remained undersupplied through the holiday quarter. Apple’s other computing devices are also likely to see slower sales. While the iPad could see demand cool versus last year, as the remote working and learning trend seen through the Covid-19 pandemic tapers off. Mac sales are expected to see a more severe slump. For perspective, IDC estimates that Apple’s Mac sales declined by close to 40.5% in Q1 2023. However, this could be offset, in part, by sales of pricier devices such as the Macbook Pros and the all-new Macbook Air.

We will be closely watching the performance of Apple’s services business. Services sales have slowed down meaningfully, with revenue growing by just 6.4% in Q1 FY’23 and by about 5% in Q4 FY’22, compared to double-digit levels in the year-ago quarter.  This is concerning, given that services are very lucrative, with segment gross margins typically standing at over 70%. The decline is likely being led by the AppStore, with people spending less on gaming and apps as Covid-19 eases.

So is Apple stock a buy ahead of earnings? While Apple stock could move slightly higher if it beats earnings, we believe the stock is fundamentally overvalued at current levels of about $170 per share. The stock trades at about 28x forward earnings, which we believe is high, given that Apple’s earnings are poised to contract this year per consensus estimates, with revenue growth projected to remain slow over the next year as well. We value Apple at about $160 per share, about 5% below the 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.

[1] Month-to-date and year-to-date as of 4/30/2023
[2] Cumulative total returns since the end of 2016