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Hey Scoopers,

Monday magic unleashed! In today’s issue, we examine the consensus estimates for Apple’s upcoming earnings and dive deeper to analyze the tech giant’s business model and fundamentals.

So, let’s go 🚀

Apple’s Fiscal Q2 of 2024 Earnings

After a stellar performance in 2023, Apple stock is trailing the broader markets year-to-date. Shares of Apple surged close to 48% last year and currently trade 14.4% below all-time highs.

Valued at a market cap of more than $2.6 trillion, Apple is the second-largest company in the world.

The next major driver of the company’s stock price will be its upcoming earnings report. Apple is set to report its fiscal Q2 of 2024 (ended in March) results within the next month.

Let’s see what Wall Street expects from AAPL in Q2.

Earnings forecast at $2.82 per share

Analysts covering Apple expect:

👉 Sales to fall by 4.5% to $90.6 billion

👉 Earnings to fall by 0.70% to $1.51 per share

In the year-ago period, Apple reported revenue of $94.84 billion and earnings of $1.52 per share.

Apple’s Earnings and Revenue Estimates

Apple is facing several challenges, which include slower consumer spending in China and multi-billion-dollar fines from regulatory bodies.

The pandemic-era stimulus was a boon for consumer electronics companies, including Apple, but the tech giant has been wrestling with multiple issues in the last 12 months.

Soon after the stimulus checks dried up, inflation started eating into household budgets. Moreover, interest rate hikes led to lower sales and narrowing profit margins.

Investors are also focused on megatrends such as artificial intelligence, where Apple’s lack of a compelling narrative has weighed heavily on share prices.

However, the key reason for Apple’s erosion in market cap can be tied to falling sales in China. In fiscal 2023, China accounted for 19% of total sales and 20% of operating income.

In addition to a slowdown in China’s GDP growth, Apple is losing market share to domestic smartphone manufacturers such as Huawei. A research report states iPhone sales in China fell by 33% year over year in February.

Apple Device Sales are Falling

Apple reported four straight quarters of declining revenue in 2023, the longest slide for the company since the dot-cum bust of 2001. Further, smartphone sales last summer were the slowest in more than a decade.

Apple is dealing with company-specific issues as it did not release any new iPad models in 2023. Additionally, in December, all current model iPads were shipping from Apple’s website in a day, signaling weak demand.

In fiscal 2023, Apple’s iPad sales fell 3.4% year over year to $28.3 billion. On a unit basis, iPad sales fell 15%, according to an estimate from Bank of America.

Sales of Mac PCs and laptops were also down 27% to $10.2 billion in fiscal 2023, and unit sales were down 11%.

Can Apple Stock Recover?

While iPhone sales are falling in China, they were up 6% in fiscal Q1 of 2024. Apple increased sales by 2% and operating income grew by 12% in the December quarter, which shows margin pressures from inflation are stabilizing.

Another driver for Apple’s expanding operating margins is its Services business, which includes verticals such as Apple Pay, iCloud subscriptions, advertising, and others.

In Q1, Apple Services accounted for 19% of total revenue. Additionally, the segment enjoys a gross margin of 73%, much higher than the 39% for product sales. It shows us that Apple’s fastest-growing business is also its most profitable.

On the other hand, iPhone sales account for 50% of total revenue for Apple. But Apple smartphone sales have leveled off after years of spectacular growth.

Apple sold 231 million iPhones in 2023, identical to the number of smartphones it sold in 2015. Further, iPhone revenue totaled $201 billion in 2023, down from $205 billion in 2022.

Services may offset some of the weakness from other hardware segments, including the iPhone, iPad, and MacBook, but software has never been Apple’s forte.

Apple’s long-standing policy of bundling its software and hardware has dampened its growth for several decades, especially when Apple wouldn’t license its Mac operating system to other manufacturers in the 1980s.

It will be interesting to see if Apple can compete with iconic software companies such as Microsoft, Alphabet, Meta Platforms, and Amazon.

Is Apple Stock Undervalued?

Apple stock has crushed broader market returns in the last two decades. Since April 2004, AAPL stock has returned a monstrous 33,400% to shareholders. After adjusting for dividends total returns are closer to 40,000%.

Apple is a cash cow that pays shareholders an annual dividend of $0.96 per share, translating to a forward yield of 0.6%.

Apple generated $40 billion in operating cash flow in fiscal Q1 and returned $27 billion to shareholders via dividends and buybacks. Since fiscal 2020, Apple has returned $432 billion to shareholders, accounting for 16% of its market cap.

AAPL stock currently trades at 25.9 times forward earnings, which is below its three-year and five-year averages. However, Apple’s adjusted earnings are forecast to expand by 11% annually in the next five years, lower than its 21% growth in the last five years.

Out of the 28 analysts covering Apple, 16 recommend “buy,” 11 recommend “hold,” and one recommends “sell.” The average target price for AAPL stock price is $202.84, indicating an upside potential of almost 20% from current levels.

The Takeaway

It’s evident that Apple is at a crossroads. While I remain cautious about the stock, I wouldn’t bet against one of the largest companies globally.

Moreover, the U.S. economy is resilient despite multiple macro headwinds. Recession fears have evaporated, and unemployment numbers are quite low. In fact, consumer sentiment is at the highest level in almost three years.

Right now, it makes sense to gain exposure to Apple by investing in exchange-traded funds that track indices such as the S&P 500 and the Nasdaq Composite.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell assets or make financial decisions. Please be careful and do your own research.