Where next for Apple stock after Q1 earnings miss the mark?
Joshua Warner February 3, 2023 2:07 AM
Apple sales fell for the first time in three years and missed expectations for the first time since 2016.
Apple sales miss the mark for first time since 2016
Apple revealed that revenue fell 5.5% from last year in the first quarter of the financial year to $117.2 billion. That was the first quarterly drop in sales in over three years.
That missed the mark considering Wall Street had expected revenue of $121.6 billion. That is the first-time sales have disappointed analysts since 2016.
The drop in revenue was driven by the first drop in iPhone sales since 2020, with revenue from its flagship product dropping 8.1%. There was also an 8.2% fall in sales of wearables and home devices and a 29% drop in Mac sales. That was countered by a 31% jump in iPad sales and a 6.6% increase in services, which hit a new quarterly sales record of over $20 billion for the first time.
That revenue miss was the result of supply chain disruption and weaker demand in China thanks to Covid-19 restrictions, worker unrest at its largest iPhone factory and softer demand for devices. Apple also missed out considering it launched the latest Mac and the new HomePod after the first quarter ended.
The strength of the US dollar was also a significant factor. Apple makes over half of its sales outside of the US, so currency plays a big role. This weighed on the topline by around 8% in the first quarter, which CEO Tim Cook described as a ‘very severe headwind.’
‘I wouldn’t want to underestimate that. We would have grown on a constant currency basis,’ Cook said.
Apple earnings plunge over 10%
Meanwhile, EPS plunged 10.5% from last year to $1.88, coming in short of the $1.95 pencilled-in by Wall Street. The bottom-line is under pressure as it continues to face tough comparatives, rising costs and slower sales growth.
It is worth noting that Apple should win some applause for cost control. For example, Apple’s margins are still considerably higher now they were before the pandemic hit despite persistently high inflation, and it hasn’t had to announce substantial job cuts after being the only member of Big Tech not to go on an overzealous hiring spree when demand exploded during the pandemic.
What does this mean for Apple?
Apple has failed to deliver sales growth so-called Golden Quarter that covers the busy holiday shopping season for the first time on record. This is the biggest period for sales of the year, and we usually see them drop off in the subsequent three quarters as we edge closer to the new iPhone being launched sometime around September.
The debate now is how many of these sales will be pushed into 2023 and how many will be lost entirely.
Apple did not provide specific guidance for the second quarter, but it is expecting to report another drop in sales, according to Reuters. The good news is that it should be a much milder drop, with markets currently anticipating a 0.3% year-on-year decline in revenue.
The problem is that iPhone sales are not expected to start growing again until the third quarter, and this may leave it too late to recoup lost sales as consumers may hold-off on upgrading and wait for the next iPhone to be released later in 2023. Wall Street already thinks annual iPhone sales will drop for the first time in three years in fiscal 2023, although overall revenue is forecast to rise 1.7% thanks to the faster growth being delivered in newer areas such as wearables and services.
Apple said the worst of the supply chain snags are now behind it, but the consideration weighing on investor’s minds is that growth is stalling, and the outlook today simply isn’t as good as it has been in recent years. Apple should keep growing, but at a much slower rate than what investors have become accustomed to. There are other reasons to be optimistic, particularly in China where both supply and demand should improve now that the economy is reopening and staging a recovery from Covid-19.
Where next for AAPL stock?
Apple shares are trading down 3.2% at $146 in extended hours trading after failing to impress the markets. That has snapped the recent rally and will see the stock fall from its highest level in over 10 weeks.
Shares are poised to fall back below the 200-day moving average today and this will remerge as the immediate upside target. Trading volumes are likely to rise for a fourth consecutive day today but it may prove difficult to keep up the momentum and recapture that 200-day moving average now that the RSI has crept into overbought territory.
Investors will hope the 100-day moving average at $143 can provide some support now that Apple is facing some pressure, but we could see it slide back toward $138, representing the level of support that emerged both in October 2021 and 2022, which is also in-line with the 50-day moving average. A slip from here would bring sub-$135 into play.
The 41 brokers that cover Apple currently have a target price of $168.40, implying there is over 15% potential upside from current levels. However, we have seen this gradually decline in recent months and we have already seen some brokers make cuts in wake of the results, including JPMorgan to $175 from $180 and Cowen & Co to $195 from $200.
Take advantage of extended hours trading
Apple released earnings after US markets closed and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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