Apple’s Q1 2023: This earnings report could be different (NASDAQ:AAPL)

Thesis

I’ll be an Apple for the long haul (NASDAQ:AAPL) bull. In my opinion, the company’s strong brand value, combined with a desire to innovate, provides an exceptional platform for further business expansion. However, looking at the upcoming revenue release (2nd February post-market close) for Apple’s December 2022, I’m a little worried — the first time since late 2018 I can remember feeling so uneasy about the world’s largest consumer brand going into earnings reporting. For reference, for the previous quarter, when other FAANGS such as Microsoft (MSFT), Google (GOOG), meta (META) and Amazon (AMZN) spectacularly missed, even me argued that “Apple’s earnings are unlikely to disappoint”.

In my opinion, there were simply too many macro challenges for Apple to comfortably meet analyst consensus estimates, which I believe are overly optimistic. Although I keep doing that defend a reasonable implied target price of $200.59/share, as a function of Q1 2023 concerns, I downgrade Apple to an (expected) temporary ‘Hold’.

Apple’s Q1 2023 earnings preview

As of January 28, 33 analysts have provided their estimates for Apple’s Q1 2023 results, according to data from Seeking Alpha. They expect total sales to be between $112.11 billion and $129.38 billion, with an average estimate of $122.05 billion. Using the average analyst consensus estimate as a benchmark, it is suggested that Apple’s sales in the first quarter of 2023 may decline by just less than 2% compared to the same quarter in 2021. In addition, analysts have provided earnings per share estimates that range from $1.71 to $2.17. Admittedly, the range is quite broad, but assuming an average of $1.96, analysts “only” expect earnings per share to contract by 6.8% compared to the same period a year earlier.

Referring to consensus analyst expectations, I would point out that revenue estimates have not deteriorated over the past 12 months, with sales expectations for Q1 2023 now roughly level compared to the same estimates made a year earlier.

Similarly, EPS expectations for the first quarter of 2023 have not changed much in recent months. In fact, analysts expect earnings per share of nearly $2, which has already been forecast at the end of 2021, when the macroeconomic situation was exceptionally great.

Why expectations may be too optimistic

Ask concerns

It is no secret that December 2022 was a period of exceptional macroeconomic uncertainty and pressure. And in such a context, it might have been difficult for Apple to maintain strong sales numbers, especially given the company’s premium pricing strategy. The assumption is confirmed by the latest IDC data, which estimates that iPhone shipments fell nearly 15% year over year in the December quarter. With that frame of reference, IDC research analyst Nabila Popal noted (emphasis added):

We’ve never seen shipments in the holiday quarter be lower than the prior quarter. However, wreduced demand and high inventories caused suppliers to drastically cut back on shipments…

… Heavy sales and promotions during the quarter helped deplete existing inventory rather than drive shipment growth. Suppliers are becoming increasingly cautious in their shipping and scheduling as they refocus their focus on profitability.

Even Apple, seemingly immune so far, faced a setback in its supply chain with unforeseen lockdowns at its key factories in China. What this holiday quarter tells us is that rising inflation and Growing macroeconomic concerns continue to hamper consumer spending even more than expected.

Needless to say, if the IDC report is correct, Apple’s revenue decline is unlikely to meet expectations of only less than 2% yoy sales contraction.

Delivery problems

Even if demand for iPhones hasn’t deteriorated, and this is a proud assumption to make, investors should remember that Apple’s sales will undoubtedly be squeezed by supply concerns. As a reminder, it is estimated that 90% of Apple’s hardware production is done in Asia, with a significant portion in China. That said, the challenging COVID situation in China (before reopening) likely had a serious impact on the company’s supply chain. Thinking about violent protests at Foxconn facilities, among other things, some analysts expected a production shortfall of iPhone units in Q1 2023 of about 6 million. In addition, waiting times for delivery of the iPhone 14 Pro, a high-margin product for Apple, have increased.

The juice will probably be in the accompaniment

Investors should note that the risk to the release of Apple’s Q1 2023 results may not be limited to the company’s December 2022 quarter, but may also extend to early 2023 outlook expectations.

So far, Apple is the only FAANG giant that has not yet announced any cost-cutting programs, including layoffs. However, this does not mean that the company does not intend to. If Apple announces a major cost-cutting program, how will the market react? Will the market celebrate margin expansion or will the market fear for Apple’s 2023 growth prospects? I think the latter is more likely.

On a more positive note, I’m excited about Apple’s 2023, as I expect the company to release more information about the company’s AR/VR ambitions. Until proven otherwise, and knowing Apple’s consumer focus, I’m optimistic about the launch. But of course, the product can also disappoint against competing products like Meta’s Quest Pro — which, in my opinion, have set the bar pretty high and taken the product lead.

Conclusion

Against the backdrop of both supply and demand challenges, I am concerned about Apple’s upcoming earnings release for the December 2022 quarter. In particular, I think it will be difficult for Apple to meet analyst consensus estimates, which, in my opinion, are too optimistic. And accordingly, while still maintaining a long-term price target of $200.59/share, I’m downgrading my recommendation for Apple to a temporary “Hold.”

For reference, while Apple has a strong history of outperforming the broad market, the company’s stock began underperforming the S&P 500 (SPY) in late November and early December. Over the past 12 months, Apple shares are down about 8%, compared to a loss of just under 6% for the SPY. A warning signal?