Apple Inc. (AAPL, Financial) owns nearly half of the smartphone market share in the U.S., accounting for 48.7% of the country's smartphone devices in 2022 according to Statista. That's according to registered devices in use, so it's about as reliable as data gets. A survey conducted by Piper Sandler indicates that iPhone sales are even better with teens as 87% of teens who answered the survey said they had an iPhone, but keep in mind this data is limited to survey responders (who trend towards the wealthy) and is thus much less reliable; for example, the survey noted that only 7% of its responses came from the Northeast region while 41% came from the South. Despite the flaws, this data point is still encouraging for the iPhone's popularity with younger generations.
Despite this, the company's stock fell last year due to the overall stock market downturn, supply chain issues and macroeconomic challenges. One of the major challenges was Apple's factory in Zhengzhou, China, which was operating at limited capacity, reducing the supply of the iPhone 14 Pro and Pro Max despite elevated demand.
However, the company recently reported that it now has more than 2 billion active devices globally and has reached new highs in its major product categories, and the management stated that production has returned to comfortable levels. Even though the company reported weak sales in the most recent quarter, Apple’s leading position in the smartphone market and its efforts to expand its services businesses makes it a tech behemoth to look out for even amid persisting economic challenges.
Thriving amid challenges
On Feb. 2, Apple reported first-quarter fiscal 2023 results, which fell short of analyst expectations. Apple reported earnings per share of $1.88, compared to the $1.94 expected by analysts. Its holiday quarter revenue fell 5.5% year-over-year to $117.15 billion, marking the first year-over-year sales decline since 2019 and the largest annual quarterly revenue drop since September 2016.
With production issues in China due to persistent Covid lockdowns, the company's iPhone revenue declined 8.17% year-over-year to $65.78 billion. Wall Street expected lower sales after the company previously reported supply chain pressures at a Chinese production facility slowing the production of iPhone 14 Pro and Pro Max devices. Both models are premium models with starting prices of $999 and $1,099, respectively, and their higher prices help raise the average iPhone selling price, resulting in higher revenues for the company. According to IDC’s Worldwide Quarterly Mobile Phone Tracker, shipments of Apple iPhones fell 14.9% year-over-year to 72.3 million units in the fiscal fourth quarter of 2022.
Despite these challenges, the company set all-time iPhone revenue records in Canada, Italy and Spain, and the latest 451 Research survey of U.S. consumers showed customer satisfaction for the iPhone 14 family at 98%. Sales of iPhones also saw strong growth in India and Vietnam, as well as record switcher levels in India and Mexico.
Because of weakening PC demand, Mac computer sales fell 29% year-over-year to $7.74 billion. PC sales increased during the pandemic's wave of working from home, but with offices reopening and economic challenges, shipments have declined. According to Gartner, worldwide PC shipments fell 28.5% in the fourth quarter of 2022 and 16.2% for the year. EMEA was the most affected region, with a historic decline of 37.2% due to political unrest, inflationary pressures, interest rate increases and the fear of a looming recession.
Commenting on the performance of this segment in the most recent earnings call, Apple CEO Tim Cook said, "We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros."
Despite the slow growth, the company is optimistic about Mac's long-term prospects. In January, Apple released new MacBook Pro models powered by the latest chips designed by the company, M2 Pro and M2 Max, enabling unprecedented performance with less energy and the longest battery life ever in a Mac. According to the most recent 451 Research survey of U.S. consumers, customer satisfaction with Mac remains very high at 96%.
Revenue from Other Products, which includes Home Accessories, Apple Watch and AirPods, fell 8.3% to $13.48 billion in the most recent quarter. However, the company continues to provide innovative experiences to strengthen its ecosystem. In home accessories, the company recently unveiled the next-generation HomePod, which features breakthrough sound and intelligence as well as support for the Matter smart home connectivity standard. This powerful smart speaker uses advanced computational audio to create an incredible listening experience and can listen to smoke and carbon monoxide alarms. The new model became available in retail locations on Feb 3.
The iPad and services segments remained strong in the recent quarter. Revenue from the sale of iPads was $9.4 billion, up 29.66% year-over-year, and services revenue, which includes Apple TV+ and App Store, was $20.77 billion, up 6.4%. Apple Pay and Apple Card were significant contributors to services revenue. Apple Pay is now available in nearly 70 countries and regions, and the company reported a significant number of Apple Pay purchases made globally during the holiday season. Apple now has over 935 million paid subscribers across its various services.
The company announced a historic 10-year partnership with Major League Soccer, as well as the launch of MLS Season Pass, which will provide fans in over 100 countries with access to every live MLS regular season game, as well as the playoffs and MLS Cup.
The company generated strong operating cash flows of $34 billion for the quarter ending December 2022. In addition, to avoid layoffs, the company has slowed hiring, and Cook plans to cut his compensation by 40%. The company expects current-quarter revenue to fall in line with the December quarter, with Mac and iPad sales falling by double digits from the previous year. Sales of iPhones will fall in the March quarter as well, but not as rapidly as they did during the holiday quarter. Services revenue, on the other hand, is expected to grow.
Valuation is a concern
Apple stock has gained close to 30% so far this year with tech stocks recovering sharply amid rising hopes for a less aggressive Federal Reserve this year.
At a forward price-earnings ratio of 25.46, Apple is no longer valued like a mature company that is likely to grow at a slow and steady pace. Mr. Market seems to be attaching a premium to Apple, likely because of its stellar financial performance in recent years.
However, as the company transforms to a services-oriented model, Apple's revenue growth rates are unlikely to impress the market in the next few years, although I still believe the company is well-positioned to grow at a steady pace. This, coupled with the expectations for a slowdown in consumer discretionary spending in the second half of this year, paints a bleak outlook for the stock. At its current valuation, Apple does not seem to offer an attractive risk-reward profile for investors.
Takeaway
The year-over-year decline in Apple’s core product sales was not unexpected, which is one reason why the market did not react aggressively to the company’s mixed earnings report earlier this month. Apple maintains its lead in the smartphone market, and the expansion of the services category is expected to be a future growth driver. While the company may experience slow growth in some of its products during a recession, it appears unlikely that it will lose market share thanks to its strong brand and popularity with young people. I would prefer a better entry point to generate attractive returns, though.
