Apple FQ4 23 – More of same

Incremental improvements and growth. 

• Apple reported reasonable results but concerns around its business in China and an accounting abnormality took their toll on the share price which fell by 3.6% in after-hours trading.
• Revenues / EPS were $89.5bn / $1.46 just ahead of estimates at $89.3bn / $1.39 but that was where the good news stopped.
• iPhone and Services were the bright spots while sales of Macs cratered falling 34% YoY while iPad was also weak falling by 10%.
• The net result was basically flat revenues for FQ4 23 which is also what the company is expecting for the next fiscal quarter.
• This would imply revenues of $117bn but crucially this quarter will be one week shorter than usual which will impact revenues by 7%.
• If one factors this back in then revenues would have grown to around $125bn which is slightly ahead of the current consensus revenue estimate of $123bn.
• I suspect that this is the main reason why the shares fell because at first glance Apple is guiding weakly for what is always its best quarter of the year.
• 7% YoY growth in this environment is better than 2023 and also reflects what Qualcomm was saying where it is seeing the handset market declining less than it had previously expected.
• However, I am not convinced that it is going to hold for the balance of the year, and I would expect something like 5% to 6% growth for 2024.
• Business is going well and services is now a proper profit contributor which is helping expand gross margins and so I have no real concerns with regard to the factors that the company can control.
• However, there are concerns with the situation in China where it is not inconceivable that it could start losing share on a wave of geopolitically driven nationalist sentiment.
• China is Apple’s second biggest revenue contributor making up 16.6% of revenues in FQ4 23 making it an obvious target should China start to get serious about retaliating against the restrictions that are being placed upon it by the USA.
• A total ban would not be catastrophic but it would be very bad news and while this is a very slim possibility, my colleague Alastair Newton of Alavan Independent thinks that the risk of this is growing.
• Furthermore, the launch of the M3 was underwhelming and nothing like the big jump in performance I was expecting meaning that on the numbers, Qualcomm’s new X Elite chipset competes well against the M3.
• Assuming Microsoft gets the software right (big assumption) then Apple will also face real competition in PC chips for the first time in a while meaning that users may stop leaving the Windows ecosystem or even return to it.
• For a company that is trading on an FY 2024 PER of 24x, one needs to see decent growth in earnings, and this is looking like it will be increasingly difficult to achieve without a major new device category to grow into.
• There is no sign of this on the horizon (The Metaverse is years away) and so I think the next few years will be categorised by incremental improvements in its products and very slow growth.
• There are far more interesting places to look and at much better prices.