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Despite a disappointing set of earnings results last week, Apple (NASDAQ:AAPL) Stocks continued their strong start to the year. Shares of the world’s most valuable company are still up more than 20% this year, but I think the near-term upside potential may be limited.
The numbers
Despite the already negative sentiment surrounding the stock, the tech giant somehow managed to miss the analyst consensus. Supply disruptions in China caused iPhone sales to fall for the first time since 2019. Additionally, Mac sales disappointed as buyers came under pressure from the rising cost of living, redirecting their purchases to cheaper iPads.
| Metrics | Consensus | Q1 2023 | Q1 2022 | Growth |
|---|---|---|---|---|
| iPhone income | $68.29 billion | 65.780 million dollars | $71.63 billion | -8% |
| Mac revenue | 9.63 billion dollars | 7.74 billion dollars | $10.85 billion | -29% |
| iPad revenue | 7.76 billion dollars | $9.4 billion | 7.25 billion dollars | 30% |
| Accessories income | $15.26 billion | $13.48 billion | $14.70 billion | -8% |
| Service revenues | $20.67 billion | 20.770 million dollars | $19.52 billion | 6% |
| total revenue | $121.19 billion | $117.15 billion | $123.95 billion | -5% |
| Diluted earnings per share (EPS) | $1.94 | $1.88 | $2.10 | -10% |
In addition, debt levels remain high, although the conglomerate’s strong EBITDA can easily cover its payments. Overall, it was a bad quarter, but given the popularity of stocks, there are numerous bullish and bearish arguments worth exploring.
the case of the bull
Bulls will be the first to point to the “short-term pain for long-term gain” argument for a number of reasons. For one thing, Apple is looking to launch its innovative virtual reality headset later this year. Many expect the product to have a higher adoption rate than Goal‘s Quest 2 due to better API. And if it succeeds, it could explode like the iPhone did in 2007. Then there’s the return of China. With a record level of domestic savings, Chinese sales could well skyrocket in 2023.
citi analyst Jim Suva also cites additional reasons to be bullish on Apple stock. The broker is confident that the company’s expansion in India will open up a new source of income. In addition, long-term service revenue will continue to grow as the number of active iPhones increases. This all adds up to expand the group’s margins, which will have a positive impact on free cash flow and its bottom line.
the bear case
That being said, there are risks associated with stocks. The biggest one for me would be their bid to launch their VR headset. Having seen the carnage in Meta from overspending with multi-billion dollar losses, I’d be equally concerned that the iPhone maker might go down the same path.
Apart from that, there is also the possibility of further production interruptions. Although Apple is trying to diversify its production sites in India, the short-term fragility of its supply chain remains a pain point. Combine that with the regulatory battles it faces surrounding its App Store, and it’s understandable why the bears have a case, too.
my verdict
Still, I think the bullish thesis outweighs the bearish arguments, especially over the longer term. After all, Apple shares have an average ‘Buy’ rating and a $173 price target from a number of analysts. This is up 14% from current levels, which is not bad.
However, I am more inclined to side with barclays on its ‘hold’ rating. This is because its forward and ex-post valuation multiples are currently at 10-year highs. I certainly have no doubt that Apple has upside potential. However, given the downside risks associated with its VR headset failing to impress, I prefer to hold on to my current gains. I’ll wait and see what happens before buying more Apple stock.
| Metrics | valuation multiples | S&P 500 Average |
|---|---|---|
| Price-Earnings Ratio (P/E) | 25.2 | 22.0 |
| Forward price-earnings (FP/E) ratio | 24.6 | 21.0 |
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