- Apple reported a weak quarter, though the market celebrated 1.9% revenue growth.
- The tech giant is forecast to continue growing revenues sub-7% for an extended period.
- The stock continues to trade as if Apple has 15%+ revenue growth while a more realistic PE target would value the stock closer to $100.
- Looking for a portfolio of ideas like this one? Members of Out Fox The Street get exclusive access to our model portfolio. Learn More »
As predicted and denied by most Apple (NASDAQ:AAPL) bulls, the tech giant reported a rather weak FQ3'22 earnings report last week. Revenues were near the weakest in the tech giant space and crucial Mac revenue actually declined YoY. My investment thesis remains Bearish on the stock, as the stretched valuation only grows with the recent rally back above $160.
Beats Aren't Enough
One of the biggest problems facing Intel (INTC) shareholders was the focus on the quarterly earnings beats while ignoring the otherwise weak results. The chip market finally fell apart and the chip giant ended up reporting a horrible quarter causing the stock to collapse.
While Apple has reported some strong quarters, the market appears to have completely ignored that the June quarter revenues only grew by 1.9%. The headlines appear to paint a far better quarter than the reality.
The tech giant beat EPS estimates by $0.05, but in general the numbers weren't impressive. Over the last decade, Apple has generally reported as many quarters similar to the low growth in FQ3'22 as those in the boom times where revenue growth exceeded 10%.
A few days after a quarterly report, an investor should start reviewing the updated analyst estimates to see how the numbers and management comments on the earnings call shaped future forecasts. Over the next few quarters, analysts again predict a period where revenue growth sees significant struggles.
The highest forecasted growth rate doesn't top 7% through the end of FY23 next September. Apple is forecast to see 2 quarters where revenue growth doesn't top 4%. After the tech giant just reported a quarter with revenues inline with analyst estimates at 1.9% growth, investors should start to see these numbers as solid. The period of smashing analyst targets during covid is officially over.
During the quarter, Apple saw Mac revenues decline YoY due in part to supply chain issues, but also due to strong covid pull forwards. The company got hit by the same problems as other tech companies where the massive growth from 2021 makes for tough comps in 2022.
Mac revenues for the quarter were $7.4 billion, down 10% from last FQ3. The new M1 and now M2 chips provide the potential for an extra boost in Mac sales, but the product has long struggled to gain much traction due to price and enterprises entrenched with PCs. The FQ3'22 revenues bring Mac sales right back to the same level reached in FQ1'19.
Due to the limited growth reported in the quarter, CFO Luca Maestri even felt the pressure to comfort shareholders with statements on the FQ3'22 earnings call to promote higher growth rates in future quarters:
Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange. On the product side, we expect supply constraints to be lower than what we experienced during the June quarter.
Priced For Perfection
The biggest problem with Apple is that the stock still remains priced for near perfection. The stock now trades at 26x forward EPS estimates despite not even reporting 2% revenue growth in the last quarter.
Microsoft (MSFT) has the same forward PE multiple after reporting 12.4% growth in the June quarter. Alphabet (GOOG, GOOGL) trades at a much lower PE multiple and the internet search giant reported the fastest growth of the tech giant group at 12.6%.
Both Microsoft and Alphabet have business models more focused on recurring revenue streams. Apple Services only grew 12% in the quarter further highlighting how such recurring revenues are very dependent on the growth of Products to drive faster growth.
For Apple, Services only amount to ~24% of total revenues, yet the tech giant is already seeing these growth rates slow to similar rates as the companies with full business models generally more focused on recurring revenue streams. Microsoft is focused on business software and Alphabet digital adverting to generate fast growth rates for the whole businesses.
Apple remains a great company, but the business is still highly reliant on more cyclical product purchases boosted during covid. The tech giant could face years where consumers pause purchases of Macs and iPads after loading up on such tech gear during 2020/21.
Per CFO Luca Maestri, Services are forecasted to slow even further during the September quarter to the lowest growth rate at least in recent years:
Specifically related to Services, we expect revenue to grow but decelerate from the June quarter due to macroeconomic factors and foreign exchange.
The key investor takeaway is that Apple remains a great company, but the stock is disconnected from the actual results reported by the tech giant. If Apple trades at 15x FY23 EPS estimates of $6.46 similar to the multiple applied to Meta Platforms (META), the stock would trade at $97.
My thesis remains that Apple will continue to trade flat to down for years, as investors eventually face the reality of the slow growth scenario at the tech giant.
If you'd like to learn more about how to best position yourself in under valued stocks mispriced by the market during 2022, consider joining Out Fox The Street.
The service offers model portfolios, daily updates, trade alerts and real-time chat. Sign up now for a risk-free, 2-week trial to start finding the next stock with the potential to generate excessive returns in the next few years without taking on the out sized risk of high flying stocks.
This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.