Apple Earnings: Hardware Headwinds Look Ominous; Stock Overvalued Versus $150 Fair Value Estimate

Apple Stock at a Glance

• Fair Value Estimate: $150.00
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Apple Earnings Update

Apple’s AAPL fiscal second-quarter results surpassed our estimates, thanks to outperformance in iPhone and services revenue. We had been anticipating a slowdown in the firm’s hardware products following several years of strong growth related to COVID-19-induced work- and learning-from home trends, as well as the initial rollout of 5G.

Although most segments fell on a year-over-year basis, we were pleased to see the iPhone and services units exhibited modest growth. We remain cautious of the next several quarters for the firm as macroeconomic headwinds persist, though we concede that wide-moat Apple will fare better than many of its smartphone peers. Our fair value estimate remains $150 per share, and shares appear overvalued at current levels.

March-quarter revenue of $95 billion fell 3% year over year with declines in iPad (13%), Mac (31%), and wearables (1%). Mac and iPad faced product launch timing differences as well as weaker demand. Positively, iPhone revenue grew 2% year over year to $51 billion, thanks to strength in emerging markets, such as India, and what we assume to be higher average selling prices. Given the iPhone 14 Pro has a superior camera and processor relative to the base iPhone 14 model, we think a richer mix will help offset unit declines in the near term.

Services revenue rose 6% year over year to $21 billion with strength in App Store, Apple Music, iCloud, and Apple Pay. Apple now enjoys over 975 million paid subscribers (up from 935 million last quarter), which we think bodes well for continued services growth as the firm increasingly monetizes its valuable installed base. Management noted quarterly sales would have been up in constant currency (500 basis points in foreign exchange headwinds). Gross margins rose 130 basis points sequentially to 44%, thanks to a more favorable product mix. With hardware sales poised to weaken while services revenue stays resilient, we think Apple’s gross margins will stay above 44% for the rest of fiscal 2023.