Will Rising Margins And Stock Buybacks Drive Apple Higher?

-5.04%
Downside
190
Market
180
Trefis
AAPL: Apple logo
AAPL
Apple

Apple (NASDAQ:AAPL) saw its sales for Q2 FY’24 fall, amid sluggish iPhone, iPad, and wearables sales. While revenue fell by 4% year-over-year to $90.8 billion, earnings came in at $1.53 per share, roughly flat versus last year. However, the earnings were better than anticipated and Apple also announced its largest-ever share repurchase authorization, leading Apple stock to gain about 6% in extended-hours trading. So what are some of the trends that drove Apple’s results, and is the stock fairly valued at $183 per share?

Apple saw its iPhone sales fall almost 10% year-over-year to  $45.96 billion for the quarter. Apple has attributed this partly to a tough comparison with the previous year’s quarter when Apple saw Covid-based supply issues ease leading to higher sales. Moreover, the iPhone is also seeing slower demand in China, where it faces mounting competition from high-end devices manufactured by Huawei. While Apple doesn’t geographically break down iPhone sales, overall revenue from China was down by about 8% year-over-year. Apple’s Mac business saw a small turnaround over the quarter after a tough 2023, with sales rising by about 4%, driven by the launch of the new MacBook Air models with an upgraded M3 chipset. Apple’s digital services business also did well, driven by higher sales at the AppStore and improving the uptake of other subscription services, with the company reporting over 1 billion active subscriptions on its platforms. Services sales came in at $23.9 billion, an increase of 14% compared to the previous year. An increasing mix of service sales and high-end products is also helping Apple boost its margins. Gross margins came in at 46.6%, up from 44.2% in Q2 FY’23.

AAPL stock has shown strong gains of 35% from levels of $130 in early January 2021 to around $175 now, vs. a similar change 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 mega-cap stars GOOG, TSLA, and AMZN.

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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?

We value Apple at about $180 per share, which is roughly in line with the current (after-hours) market price. Although Apple’s growth is likely to remain muted this year, we think that Apple should see an upside from selling more premium products and a greater mix of services. Apple also has a big opportunity in the generative AI space. Although Apple has avoided making big announcements on the AI front over the past year, unlike rivals such as Microsoft and Facebook, following the success of ChatGPT and similar tools we believe Apple could be a big winner in this space for a couple of reasons. Unlike most companies that use public data, large language models, and high-power GPUs, Apple has a unique position in terms of implementing AI on-device, while keeping user data private. Apple’s stock buybacks should also support its share price. Apple’s board has authorized $110 billion in buybacks, up from the $90 billion authorization last year.  See our analysis of Apple’s Valuation for more details on what’s driving our price estimate for Apple and how it compares with peers.

Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 AAPL Return 2% -10% 541%
 S&P 500 Return 1% 6% 126%
 Trefis Reinforced Value Portfolio 0% 0% 612%

[1] Returns as of 5/3/2024
[2] Cumulative total returns since the end of 2016

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