Apple (NASDAQ:AAPL) is expected to publish its Q4 FY’23 results in early November, reporting on a quarter that is likely to see Apple’s key computing products continue to see sluggish demand. We expect earnings to stand at about $1.32 per share, slightly ahead of consensus estimates. On the other hand, we expect revenues to come in at about $84.1 billion, marking a decline of about 6.5% versus last year and marginally below consensus estimates. So what are some of the trends that are likely to drive Apple’s results for the quarter?
Amidst the current financial backdrop, AAPL stock has shown strong gains of 35% from levels of $130 in early January 2021 to around $175 now, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. However, the increase in AAPL stock has been far from consistent. Returns for the stock were 35% in 2021, -26% in 2022, and 34% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – indicating that AAPL underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, NVDA, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAPL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?
Overall, we expect sales of products such as the Mac and iPad to also decline year-over-year, as the remote working trend eases and the broader PC and tablet markets cool. For example, Gartner indicated that global PC shipments fell by 9% in Q3, while Apple’s Mac shipments fell by an estimated 24%. However, sales of the iPhone could prove a bit more resilient, given the traction that Apple is seeing in markets such as India, Indonesia, and Turkey where installment plans and trade-in programs are helping drive demand. While Apple released its latest iPhone 15 smartphones toward the end of the quarter, we do not expect to see a meaningful impact from the new devices, which remained on sale for just a little over a week during the quarter. Apple’s digital services business should partly help Apple ride out the lull in its hardware business driven by higher sales at the AppStore and improving the uptake of other subscription services. However, growth rates are likely to remain below the levels seen last year. For example, over the first 9 months of this fiscal year, services sales expanded by about 9%. We also expect that Apple’s gross margins will hold up, driven by a higher mix of service sales, a more favorable sales mix skewed toward premium products, and also due to some cost savings. Over Q3 2023, gross margins stood at 44.5%, up from 43% in the year-ago quarter.
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While Apple stock could move higher if it beats earnings, we believe that the stock is slightly overvalued at current levels of about $173 per share. Apple stock currently trades at over 30x 2023 earnings, which is high relative to historical levels. Moreover, 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 $168 per share, about 3% 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.
|S&P 500 Return||-2%||10%||88%|
|Trefis Reinforced Value Portfolio||-3%||19%||514%|
 Month-to-date and year-to-date as of 10/24/2023
 Cumulative total returns since the end of 2016
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