Down 5% Over The Last Month, Will Strong iPhone Sales Help Apple Offset Mac Headwinds In Q1?

-2.27%
Downside
182
Market
178
Trefis
AAPL: Apple logo
AAPL
Apple

Apple (NASDAQ:AAPL) is expected to publish its Q1 FY’24 results in early February, reporting on a quarter that is likely to see Apple’s key computing products continue to exhibit sluggish demand. We expect earnings to stand at $2.10 per share, about in line with consensus estimates. On the other hand, we expect revenues to come in at about $118 billion, marking a marginal increase year-over-year and slightly ahead of consensus estimates. So what are some of the trends that are likely to drive Apple’s results for the quarter? See our dashboard  Apple Earnings Preview for a closer look at what to expect when the company publishes results.

We expect sales of products such as the Mac and iPad to decline year-over-year, as the remote working trend eases and the broader PC and tablet markets remains muted. For example, IDC indicated that global PC shipments fell by close to 3% in Q4, with Apple’s Mac shipments declining by an estimated 18.4%. [1]  However, sales of the iPhone could prove a bit more resilient, given that this will be the first full quarter since the launch of the new iPhone 15 devices. Moreover, Apple is seeing traction in markets such as India, Indonesia, and Turkey where smartphone installment plans and trade-in programs are helping drive demand. Apple’s digital services business should also 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. Over Q4 FY’23, services sales grew 16% to $22.3 billion, returning to double-digit growth, after growing by single-digit levels in the previous two quarters. 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.

Looking at a slightly longer term, AAPL stock has seen extremely strong gains of 45% from levels of $130 in early January 2021 to around $190 now, vs. an increase of about 25% 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 49% in 2023 In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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?

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We value Apple at about $178 per share, which is slightly below the market price. We think Apple’s valuation is a bit rich with the stock trading at about 27x 2024 consensus earnings, which is slightly high compared to historical levels. Moreover, revenue growth is also likely to remain in mid-single-digit levels over the next year, per consensus estimates. See our analysis of Apple Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

Returns Jan 2024
MTD [1]
Since start
of 2023 [1]
2017-24
Total [2]
 AAPL Return -2% 46% 599%
 S&P 500 Return 0% 25% 114%
 Trefis Reinforced Value Portfolio -2% 35% 593%

[1] Returns as of 1/19/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. Worldwide PC Shipments Declined 2.7% Year Over Year in the Fourth Quarter of 2023, IDC []