With Growth Slowing, Is Apple Stock Still A Buy?

Apple
AAPL
published a stronger-than-expected set of Q2 FY’23 results. While revenues declined -2.5% versus last year to $94.84 billion, due to lower Mac and iPad sales as well as currency headwinds, this was partly offset by higher sales of digital services and resilience in the iPhone business. Earnings remained almost flat versus last year at about $1.53 per share. So what are some of the trends that have been driving Apple’s results?

Apple’s iPhone business expanded by about 1.5% versus last year, driven by a strong uptake in emerging markets such as India, Indonesia, and Turkey where the company’s installment plans and trade-in programs are helping drive demand. Moreover, it’s likely that Apple saw availability, particularly of the iPhone 14 Pro devices, which remained undersupplied in late 2022. Apple’s digital services business also grew by about 5.5% versus last year with revenue touching a record high of $20.9 billion, driven by strength in the AppStore as well as other subscription services. However, growth rates remain well below the 17% levels seen in Q2 FY’22, as areas such as gaming see a slowdown with the pandemic easing. Apple’s Mac sales declined by about 31% versus last year as the broader PC market faces macro issues, with the easing of Covid-19 related tailwinds such as the remote working and learning trend. That said, interestingly Apple continued to expand its gross margins, with the metric standing at 44.2%, up from 43.7% in the year-ago quarter driven by a higher mix of services sales, the launch of more premium products, and also due to some cost savings.

So is Apple stock a buy post-earnings? We believe the stock is slightly overvalued at current levels (pre-market Friday) of about $170 per share. The stock trades at over 28x forward earnings, which we believe is high, given that 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 $162 per share, about 5% 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.

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