Like many of its mega-cap tech peers, Apple (AAPL) shares have traded sideways to slightly down over the past month. In fact, Apple stock has given up close to 6% in thirty days, while the S&P 500 index has risen almost 1%. But don't expect that under-performance to continue, according to analyst Dan Ives of Wedbush Securities.
Citing what he calls the “AI gold-rush,” which he believes will propel tech stocks to add another 12% to 15% before the end of the year, Ives listed Apple among the tech stocks that should be bought on any pullback. "From the hundreds of conference calls we listened to over the past month [it's] clear that the AI theme is changing the enterprise and consumer landscape going forward and creating a bifurcated spending environments for the winners and losers in this backdrop," Ives wrote.
Apple which lost 22% of its value in 2022, has gained 37% year to date, besting the 16% rise in the S&P 500 index. Over the past six months, the stock has risen some 18%, while the S&P 500 index has risen 9%. However, since its Q3 earnings results, the stock has grossly under-performed. I believe some investors focused too much on iPhone unit sales and not enough on the bigger picture.
During the quarter, Apple’s consolidated revenues reached $81.8 billion, slightly beating the expected $81.7 billion. The adjusted EPS came in at $1.26, topping the $1.19 expected. But investors focused instead on the fact that revenue total of $81.8 billion marked a marginal 1.4% year-over-year decline. Some investors were seemingly disappointed in the iPhone segment, which suffered 2.5% year-over-year drop with revenue of $39.7 billion. Given that Apple is in a refresh cycle year with the iPhone 15 set to launch, the weakness in current iPhones was expected.
However, the most important aspect of the quarter were the positive side. For example, Apple's Services segment outperformed, generating $21.2 billion in revenue, surpassing the estimated $20.7 billion, all of which led to consolidated gross margins of 44.5%, reaching an all-time high. Calling this a remarkable feat would be an understatement. But it also highlights the strength of Apple’s management team and their ability to not only achieve supply chain efficiencies, but also their well-timed pivot towards the Services segment.
Currently on track to reach $100 billion in annual revenue by FY24, Apple’s Services segment, which grew 8% during the quarter, has become a dominant force, accounting for over 25% of its total revenue. But the good news didn't stop there. Apple surpassed the 1 billion paid subscribers mark. The management’s focus on emerging markets such as China and India, which were important regions for Apple during the quarter, has been justified.
On the balance sheet side of things, Apple's management team, which previously set a goal of achieving cash neutrality, is out-performing there as well. As of the end of fiscal Q3, Apple had a net cash position of $57 billion, including returning some $24 billion to shareholders through dividends and buybacks. The company is generating more than $25 billion in free cash flow each quarter, flexing some financial strength that gives Apple the capacity for future stock buybacks.
The upcoming iPhone 15 launch and other innovations are expected to drive demand. Furthermore, profitability is projected to increase, with margins approaching 26.0%, driven by operational leverage and favorable mix. So despite some short-term concerns, the recent pullback in the stock provides an opportunity. With the shares trading about 15% below my fair value estimation of $210 per share, Apple stock presents a strong value for the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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