Driven by prolonged monetary tightening, the tech-heavy Nasdaq Composite Index suffered the worst of the three major averages in 2022, and among the biggest decliners were large-cap technology stocks such as Apple (AAPL).
Although Apple ended the year as the world's most valuable company, it suffered a massive market cap decline of roughly $755 billion, ending the year with a market valuation of $2.07 trillion. However, after licking their wounds in 2022, Apple investors have some strong catalysts to be excited about in 2023. To be sure, inflation continues to drive higher operating expenses for several companies like Apple, which remains a headwind for its profit margins. This has not been lost to the market, however.
In fact, Friday’s close of $134.76 is still about 13.5% below its three-month high of $155.74, which it logged on October 28. The reason for the recent decline has been due to a combination of factors, namely growing concerns about the growth of the Services segment, in particular the App Store, as well as iPhone unit shipments. Last Wednesday, analyst Tim Long at Barclays cited the company's recent production issues in China and "weakening demand" across certain hardware categories, and lowered his earnings estimates not only for the just-ended first quarter, but also for the second quarter and the entire fiscal year.
"What started out as production driven cuts has moved to demand weakness across product categories," wrote Long. "We are also concerned by decelerating Services growth. We are lowering estimates accordingly.” Long’s concerns are valid as the company has suffered from prolonged labor shortages at its main production facility in China. Supply chain disruptions and rising inflation have also been among the many events that have pressured the company's revenue and profits in 2022.
However, it’s hard to ignore the attractive valuation in Apple heading into 2023. While iPhone sales generate a sizable portion of revenues, Apple’s collective high-margin Services businesses are also growing. Apple Services segment in 2022 generated a gross margin of 72%, compared to 36% for hardware and devices. In 2023, investors can expect stronger revenue growth and margin expansion, thanks to price increases on Apple Music, TV+ and its One bundle. It remains to be seen if the Services segment can power the company through what is expected to be a tough hardware environment.
Apple is set to report first quarter fiscal 2023 earnings on Thursday, Feb 2 after the close. In the three months that ended December, Wall Street expects the company to earn $1.95 per share on revenue of $122 billion. This compares to the year-ago quarter when earnings came to $2.10 per share on revenue of $123.94 billion. This means both revenue and profits are expected to decline.
Still, outside of fundamental reasons, Apple rarely suffers stock declines in back-to-back years. In fact, Apple stock often outperforms the market following a down year, producing median return of 35%. Not only is that return stronger than its FAANG peers, it is also ten percentage points higher than the company’s typical annual return of about 24.5% since its IPO in 1980. With a consensus analyst price target of $176, which suggests 30% upside from current levels, Apple stock should be on any short list of stocks to buy in 2023.
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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