Apple: A Buy Ahead Of Q1 Earnings Announcement (NASDAQ:AAPL)

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Apple (NASDAQ: AAPL) the quarter has seen mixed signals from analysts and other companies regarding hardware, especially smartphone shipments as it approaches its first quarter 2023 earnings results.That said, we anticipate Even macro uncertainties related to the war between Russia and Ukraine have dragged on the China theme throughout the year as Chinese consumers may return. Despite a somewhat blurry outlook from consensus, we’re doing our best to piece together some of the more useful points heading into the quarter.

Apple plans to report financial results for the first quarter of 2023 after the market closes on February 2, 2023. Apple is expected to report revenue of $ 121.67 billion. First quarter 2023 EPS is $1.94. We believe there is room for surprises in consumer hardware, especially the iPhone. Signals from the sell-side suggest that lower expectations mean hardware will take a hit, with service and software revenues remaining strong to help offset the weakness in the PC hardware cycle. Note that smartphones may be able to escape computer hardware woes, given their low correlation with mining hardware trends.

Additionally, AAPL expects to bring in $406.15 billion in revenue in fiscal year 2023. EPS of $6.53 for FY23 beats consensus for his $402.54 billion. $6.17 EPS for sure. The company expects to hit the beat primarily due to higher-than-expected iPhone channel sell-ins, higher-than-expected contributions from services, and gross margin contributions from using the company’s in-house silicon. We expect profitability trends to remain neutral to marginally positive, depending on the severity of the AAPL employee layoffs.

The stock is valued at $155.70 and is estimated at 8.29 dildres for FY25. EPS means a future earnings multiple of 18.78 times on the 25-year result after he factored in a 9.9% discount based on the company’s WACC. We expect a modest gain in equities of +7.38%, reflecting the types of returns Dow constituents are likely to generate in this environment. A better-than-expected outlook, or a surprise earnings result in the form of hardware shipments that outperform consensus makes us progressively more positive.

We also think the upside is somewhat limited, but we think a stable dividend, growth and portfolio diversification should be enough to mitigate the downside argument and make it one of the better blue chips. We believe it will accumulate in the event of an economic recession or slowdown in growth.

Key Apple news items for the quarter

A recent update to the iMac and MacBook Pro or PC lineup is much needed given the lagging performance of Intel processors and the need for differentiated hardware via the M2 Pro and M2 Max chipsets. It’s hard to tell how much of Intel’s (INTC) reported decline in consumer PC shipments and how much of that shipment decline is related to Apple’s simply moving away from the X86 ecosystem. It will be revealed in the announcement.

Foreign exchange could have a positive impact on quarterly results, at least according to UBS analyst David Vogt.

“The Jan. 21 estimate does not reflect the strength of the four major currencies (EUR, GBP, YEN, and CNY) against the U.S. dollar in the December quarter. The quarterly FX headwind guide is 400-500bps (4-5 points) too conservative, de-risking earnings and EPS ahead of earnings on Feb 2.”

The company will reference China shipment performance through its quarterly earnings calls and expects near-term results to be driven by improved sell-through and product outlook in China, or expansion into new categories. A Mac refresh is sorely needed, and the company’s efforts to move into gaming and VR will help ease some of the hardware-related negativity this quarter.

Apple’s layoffs will be another issue likely to be raised by analysts and members of the news media after the earnings release. Apple doesn’t need to lean in right now, so there could be minor layoffs, perhaps less than 5% of its workforce, while other companies are shrinking their workforces in favor of increased productivity. may have some impact on the AAPL given the fact that you choose to Added air cover for cost. Tim Cook’s tenure as CEO of Apple, a company with the highest operating margins for OEM hardware in its segment and company-level operating margins hovering between 29% and 30% for his fiscal year. We expect to benefit from cost structure discipline for most of the period. 21st and his 22nd pushes that point further.

We believe that the decline in labor force participation rates related to Covid-19 has caused different companies to adopt different policies to move their employees back into the office, either digitally or at headquarters. Many employees have remained safely hired at AAPL by focusing on high-performance business units, while other technology companies are making cutbacks, largely in underperforming business segments, where Apple does not have a non-profit contribution segment. talk. Even legacy businesses like old accessories are considered profitable in the form of ongoing service and repair related revenue.

It also explains why Apple needs to shrink its retail footprint if it helps establish more verticality in Apple’s distribution separate from its e-commerce channel and generate revenue from hardware service and warranty contracts. It is also difficult to discuss. Assuming the cuts are made strategically and the bottom 5% of performers are in the area of ​​the company where the cuts are being made, other than using the usual MBA approach of unloading the bottom 5% of corporate performers, Apple It is difficult to imagine where can be reduced. I was able to make it.

Data on inventory and channels raise concerns among managers

We also expect data on inventory outflows within the channel, or availability of hardware components, to be of interest. Analyst sentiment has been linked to inventory, and lack of availability in certain markets has been linked to whether Apple has delivered enough devices in Q1 2023, a seasonally strong quarter. Although biased, it can cause anxiety.

Figure 1. JP Morgan Apple Availability Tracker

Towards the end of the year, supply appears to have started to thin out towards the end of the year, but the number of days of inventory available or availability trackers is showing a easing trend compared to last year, according to the analyst who released it. The survey suggests. So, as a lot of hardware data suggests from third-party reports, smartphone shipments are expected to be bad this year, but how much depends on how many phones are leaving the inventory channel. . Apple did a pretty solid job heading into the end of the year, cleaning out inventories and extracting a lot of revenue heading into a seasonally strong fourth quarter.

It’s not clear what analysts will say about some inventory cleanups to deliver millions of units above consensus. For the most part, we haven’t heard much news from other semiconductor makers other than Intel, and given the company’s inherent weaknesses, it’s worth looking at performance differences in the computing sector to see where your business can outperform. You have to judge.

Compared to traditional PC hardware, we believe smartphones may buck this trend, but Apple’s decoupling from x86 hardware has made it difficult for third-party reports to sort out Apple’s volume. is becoming more difficult. The argument favors shareholders as Apple can maintain high-margin PC shipments while working to improve his IC (integrated circuit) or hardware design level of the M-based architecture for desktops/notebooks. . The impact on industry data of the adoption of ARM-based silicon for more advanced graphical applications.

Apple related to computer hardware because it believes a move to better hardware will drive the argument for better margins over time rather than imminent job cuts that do little to reduce variable costs. That’s why we’d like to see more clarity about the shipment of the .Reducing the hardware bill of materials and adding control over hardware and software are Apple’s differentiators.

We also don’t know how well the component side of the business is doing from Samsung, or if there has been any decline, as Samsung (OTCPK:SSNLF) hasn’t reported any revenue at the time of this writing. Shipments are as shown by IDC’s Q4 2022 mobile his smartphone shipment tracker. Based on third-party research data, iPhone shipments are expected to fall -14.9% for Apple and -15.6% for Samsung.

Financial model caveats to consider

Keep in mind that analyst models will ship between 79 million and 82 million iPhones in the Q1 2023 earnings quarter. This compares to his 85 million shipments announced in the IDC report. Much of the plus is expected in other hardware categories and continued service revenue contributions.

Figure 2. Apple’s financial model

We believe the upside will remain somewhat limited unless there is something we have not yet captured in our model. Based on the impact of foreign exchange, we expect a slight 2-3% favorable volatility in revenues and earnings. And because the company reports on his GAAP basis, the currency impact of a weaker dollar in the quarter can help bring surprises to its results.

Additionally, we recognize that the survey data mostly outstrips the consensus iPhone shipment numbers. This means you can beat estimates with survey data alone, and even channel sell-ins.

Our homework shows a better quarter than expected

We believe the stock will report modest gains in earnings and sales to end FY23, and we expect gradual improvement in operating margin through FY25, with modest growth of $418 billion in sales in FY24 We expect the environment to be weak. ’24 vs. Consensus revenue is estimated at $425 billion for fiscal year ’23. Given the overwhelming negativity heading into this part of the PC cycle, we think it may be difficult to meet this year’s estimates, but Apple operates a separate and independent ecosystem, so exposure is We believe it is limited and Apple can provide performance beyond the x86 ecosystem. Return value.

As for the blue chip hardware names, Apple could probably bounce back and generate positive revenue growth of 10%-12% in a major iPhone refresh year. So the iPhone 15 combined with stronger macro sentiment from China and a darker sky tied to the US macro makes us more optimistic and gives us room to revise our valuation model estimates. . For now, we expect a modest uptick of 7.38% based on the inputs we’re working on, and given the diversification of our business, we’re looking forward to dividend payouts, capital returns, and an economic storm. We recommend “buying” this stock based on its strong track record of surviving. Portfolio and geographical combination, along with an excellent balance sheet.