Can this tech titan continue to defy gravity or will consumer headwinds bring it back down to Earth?

It's been a week of restless nights for global investors. With tech behemoths Microsoft and Amazon sharing nightmarish guidance and disappointing estimates in their quarterly earnings results, there was little hope for the world's biggest company to continue to "think different". 

Braced with just a few hours of sleep, Alphinity's tech expert Trent Masters - like many global analysts - expected a comparatively soft quarter from Apple (NASDAQ: AAPL). But somehow, the tech titan's results managed to defy gravity. 

The consumer tech giant reported an 8.14% lift in revenues year on year for the fourth quarter to US$90.15 billion, beating estimates by 1.41%. It's no surprise then that earnings per share (EPS) also lifted, up 3.2% to US$1.29 (versus the US$1.27 analysts estimated). 

However, in an increasingly worrying economic landscape, will consumers continue to fork out more than $1000 for the latest iPhone? And do we really need to update our even more expensive Macs when they already run (albeit some louder and hotter than others) perfectly fine? 

As Masters describes, "at the sector level, things are - in a word - horrible". And while recent company calls have had him reaching for the scotch, the outlook for Apple - thanks to its lack of guidance - remains undecided. 

In this wire, Masters entertainingly outlines the highs and lows of the world's biggest company's latest quarterly earnings report and also shares why he would be selling the stock in the short term despite its miraculous gravity-defying result. 

Q4 Key Results 

• Earnings per share (EPS): US$1.29 versus US$1.27 estimated, up 3.20% YoY
• Revenue: US$90.15 billion versus US$88.90 billion estimated, up 8.14% YoY
• iPhone revenue: US$42.63 billion versus US$43.21 billion estimated, up 9.67% YoY
• Services revenue: US$19.19 billion versus US$20.10 billion estimated, up 4.98% YoY
• Wearables, Home and Accessories: US$9.65 billion versus US$9.17 billion estimated, up 9.85% YoY
  
• Mac revenue: US$11.51 billion versus US$9.36 billion estimated, up 25.39% YoY
• iPad revenue: US$7.17 billion versus US$7.94 billion estimated, down 13.06% YoY
• Gross margin: 42.3% versus 42.1% estimated
• Cash on its balance sheet: US$23.65B down 9.7% YoY

Note: This interview took place on Friday, 28th October 2022. Estimates from CNBC/Refinitiv. In some of Alphinity's funds, Apple is a small holding (they have been reducing their position size in these funds over recent months). 

In one sentence, what was the key takeaway from this result?

A solid result in an increasingly challenging environment that stands in stark contrast to significant weakness across other consumer electronics businesses. The key question is, can Apple continue to defy gravity?

What was the market’s reaction to this result? In your view, was it an overreaction, an underreaction or appropriate?

Rating: Appropriate

The market couldn’t quite make up its mind about the result (there was something for bulls and bears in this one) so after whipping around as management spoke, the stock finished flattish in the after-market. 

This makes sense to me given the inherent uncertainty in the outlook from here. This reporting season has been all about company guidance given how quickly the world has been changing (and stopping in some areas). 

But Apple provides relatively little definitive guidance due to “continued uncertainty around the world in the near term” leaving the market to grope around in the dark about its future direction. There was enough in this result to paint both positive and negative narratives for the year ahead.

Were there any major surprises in this result that you think investors should be aware of?

At an underlying level (putting aside the huge Mac numbers as these will reverse next quarter) the main surprise across the product portfolio was wearables. I can still remember the anger when Apple removed the headphone jack from their phones but now using a cable to connect audio seems archaic, and Airpods are a nice contributor to revenues for the business. And the Apple watch also continues to gain traction. 

The surprise here is that the wearables part of the portfolio tends to be more macro-exposed, as they are more of a “nice to have” than a “must have”. 

The other surprise in a high-level sense is the level of fx impact that Apple will have to work through. In the guidance commentary, Apple talked of a 10% fx headwind for the coming quarter. The impact on US multinationals from the strength of the USD is quite extraordinary and this needs to be kept in mind when assessing underlying business performance.

Would you buy, hold or sell Apple on the back of these results?

Rating: SELL

It's a short-term sell and a buy for investors with a longer-term time horizon. The quality of the business is undoubted, and they continue to release new products to their customers with the same high-quality Apple design and manufacturing base that we have all come to know and love. From AirPods to watches, perhaps a virtual reality headset and even a car in the future, the product set continues to expand. In services, there are now payments, health services, streaming, and advertising as the breadth of the services offering continues to increase. 

Apple continues to build out the ecosystem and increase the monetisation of a very large customer base. However, at its core (absolutely no pun intended), Apple is still largely a consumer electronics company with 50% of its revenue coming from iPhone and 70% of its revenue coming from products more broadly.

That said, it is an increasingly difficult time for a business to sell high-priced consumer electronics. So while the business is exceptionally well placed over the long term, over the next 12 months it is running into headwinds that continue to get stronger. And due to this, I expect the business to underperform over the short term. 

What’s your outlook on Apple and its sector over FY23? Are there any risks to this company and its sector that investors should be aware of?

At the sector level, things are, in a word, horrible. Smartphone markets have been very poor globally and PC markets horrendous. Consumer electronics more broadly have also been poor. And listening to semiconductor company calls exposed to these areas gives little cause for hope in the near term (in fact, those calls have you reaching for the scotch). 

So at the industry level, I’d expect these areas to remain under significant pressure and investors should be wary as consumers narrow their spending. In terms of Apple, its performance in the face of these pressures to date has been remarkable, but can it continue? Can consumers really continue to spend over $1000 on a new phone at the same rate they did before?

At a basic level, an investor should ask themselves if, in their current circumstances, they still feel compelled to go and buy the new iPhone. If the Apple design and brand pull means the answer is a yes, then the stock will get through ok. If the answer is “I’ll hold onto my old phone for now”, then that means some pressure is coming down the line for Apple as we move into 2023. 

Personally, I’m in the “I’ll keep my existing phone for longer” camp. And I bought a new PC to work from home last year, and a new iPad so my kids could be home-schooled (I shudder just remembering that experience). So I am far more cautious in the shorter term. 

If Apple can continue to defy these headwinds into 2023, it will be one of the most remarkable management performances I’ve seen. It will be akin to defying gravity.

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