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Despite last week’s disappointing earnings results, Apple (NASDAQ:AAPL) stock continues its strong start to the year. Shares in the world’s most valuable company are still up more than 20% this year, but I think the upside potential for the near term may be limited.
The numbers
Despite the negative sentiment surrounding the stock, the tech giant still managed to beat the analyst consensus. Supply disruptions in China led to iPhone sales falling for the first time since 2019. In addition, Mac sales disappointed as shoppers hit by the rising cost of living shifted their purchases to the cheaper iPad.
| Metric | Consensus | Q1 2023 | Q1 2022 | Growth |
|---|---|---|---|---|
| iPhone revenue | $68.29 billion | $65.78 billion | $71.63 billion | -8% |
| revenue Mac | $9.63 billion | $7.74 billion | $10.85 billion | -29% |
| iPad revenue | $7.76 billion | $9.40 billion | $7.25 billion | 30% |
| Accessory income | $15.26 billion | $13.48 billion | $14.70 billion | -8% |
| Service revenue | $20.67 billion | $20.77 billion | $19.52 billion | 6% |
| Total revenue | $121.19 billion | $117.15 billion | $123.95 billion | -5% |
| Diluted earnings per share (EPS) | $1.94 | $1.88 | $2.10 | -10% |
In addition, debt levels remain high, although the conglomerate’s strong EBITDA can cover repayments. Overall, it’s a bad time, but given the stock’s popularity, there are many arguments and bear arguments worth exploring.
Bull case
Bulls will be the first to point out the ‘short-term pain for long-term gain’ argument for a number of reasons. For one thing, Apple wants to launch a virtual reality headset later this year. Many expected the product to have a higher adoption rate than it did Meta‘s Quest 2 because of its better API. And if it succeeds, it can explode like the iPhone in 2007. Then there is the return from China. With record household savings rates, Chinese sales could go through the roof by 2023.
Citi analyst Jim Suva also cited additional reasons to be bullish on Apple stock. The broker is confident that the company’s expansion into India will open up new revenue streams. What’s more, long-term service revenue will continue to grow as the number of active iPhones increases. This all adds up to expanding the group’s margins, which will have a positive impact on free cash flow and the bottom line.
The case of the bear
That said, there are risks associated with these stocks. The biggest one for me would be the bet on launching a VR headset. After seeing the carnage in Meta of massive spending with multi-billion losses, I would worry that the iPhone makers could go down the same route.
In addition, there is also the possibility of further production disruptions. Although Apple is trying to diversify its production sites to India, the short-term fragility of the supply chain remains a weak point. Couple that with the regulatory battles facing the App Store, and it’s understandable why bears have a case, too.
my verdict
Even so, I believe the bullish thesis outweighs the bearish argument, especially in the long run. After all, Apple stock has an average rating of ‘buy’ and a price target of $173 from various analysts. This gives an increase of 14% from the current level, which is not bad at all.
However, I’m more inclined to side Barclays in a ‘hold’ rating. This is because trailing and forward valuation multiples are currently at 10-year highs. I certainly have no doubt that Apple has upside potential. However, given the risks associated with VR headsets failing to impress, I prefer to hold on to the benefits for now. I’ll wait and see what happens before buying any more Apple stock.
| Metric | Multiples of value | S&P 500 average |
|---|---|---|
| Price-to-earnings (P/E) ratio. | 25.2 | 22.0 |
| Price-to-earnings ratio (FP/E). | 24.6 | 21.0 |
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