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Aug 06, 2023Apple Earnings: Solid Results As Next Wave of iPhones on Deck
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Apple stock overvalued with mid- to high-single-digit revenue growth ahead.
Wide-moat Apple AAPL reported solid results for its fiscal third quarter and provided investors with a flattish outlook for the September quarter. We continue to take Apple’s results in both the June and September quarters with a grain of salt, as results are composed of the older iPhone series and we would instead keep our eyes on the next wave of Apple devices and whether Apple can entice a larger portion of its customer base to buy the latest and greatest iPhone.
We maintain our fair value estimate of $150 per share and view shares as overvalued. We’re encouraged by Apple’s success in reaching 1 billion paid subscribers for its services businesses, but still struggle to foresee the company as being more than a mid- to high-single-digit revenue grower in the long term.
Revenue in the June quarter was $81.8 billion, down 1% year over year as reported, but up on a constant-currency basis. The iPhone revenue performance was similar, down 2% year over year as reported but up in constant-currency terms. We’re encouraged that Apple saw a June-quarter record in switchers to iPhone and away from Android.
Services revenue was the bright spot, up 8% year over year and ahead of expectations, with June-quarter records in several subsegments like video and payment services. The iPad and Mac revenue continue to struggle after a natural slowdown in these markets post-COVID-19 lockdowns, as revenue was down 20% and 7% year over year, respectively. Apple remained highly profitable with a record high gross margin of 44.5%, up 20 basis points sequentially.
In the September quarter, Apple expects revenue to be flattish on a year-over-year reported basis. On the upside, iPhone and services year-over-year growth should accelerate and currency headwinds should dissipate. However, Apple expects iPad and Mac revenue to be down at least 10% year over year because of tough comparisons to a strong September 2022 quarter.
We see virtually all tech companies being asked about artificial intelligence. On this front, we heard Apple discuss its investments in AI and machine learning and how it is integrated into many of its products already.
Generative AI, such as ChatGPT where the AI generates new content rather than surfaces patterns within existing data, is also an area where Apple is investing, albeit secretly. Ultimately, we foresee a host of niche or customized generative AI models being infused into software and platforms over time, and Apple’s work here is no exception.
We would speculate that any sort of co-pilot functionality would make sense to us within Apple’s suite of products, given all of the services Apple layers within its devices and its integration across various form factors.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.