Apple Deftly Navigates Challenging Supply Environment in Fiscal Q3 Earnings Results but Headwinds Loom

Apple Stock at a Glance

• Current Morningstar Fair Value Estimate: $130
• Star Rating: 2 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Apple Earnings Update

Narrow-moat Apple (APPL) reported healthy fiscal third-quarter results that came in line with our estimates. We are maintaining our $130 fair value estimate and still view shares as overvalued.

While we remain positive on Apple’s ability to extract sales from its installed base via new products and services, we believe demand for Apple’s products is likely to slow in the next few quarters, following several stellar quarters of growth.

Third-quarter sales of $83 billion were up 2% year over year thanks to growth in iPhone (3%) and services (12%). The Mac and iPad segments fell 10% and 2% year over year, respectively, which we anticipated due to unsustainable COVID-19-induced work- and learn-from-home trends that boosted PC and tablet demand. Gross margin of 43.3% was down 40 basis points sequentially due to a seasonal loss of leverage and foreign exchange headwinds, partially offset by a more favorable mix.

Expecting Low-Single Digit Growth

Management refrained from giving explicit revenue guidance for the September quarter due to macroeconomic uncertainty, but we expect low-single-digit year-over-year growth led by the iPhone and services segments. We’re impressed that Apple now enjoys over 860 million paid subscribers (up from 825 million last quarter). Despite broader weakness in the smartphone industry, we expect Apple’s upcoming iPhone 14 will enjoy strong demand in China, following multiple months of COVID-19 lockdowns in China that hampered consumer spending.

Inflation and Potential Recession to Slow Hardware Sales

However, we think broader hardware sales for the firm are likely to slow as consumers deal with inflation and a potential recession.

Supply constraints for the September quarter are expected to be lower than those experienced during the June quarter, though we suspect macroeconomic headwinds (inflationary pressures and recessionary fears) are likely curbing demand for Apple’s hardware products. The firm is also facing foreign exchange headwinds, which are expected to negatively affect September quarter sales by 600 basis points.