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Wednesday, Feb. 1, 2023
Apple's upcoming earnings could be a bellwether for the rest of the industry
Apple (AAPL) will report its first quarter earnings after the bell on Thursday. The announcement follows a string of stinging reports from tech companies including Intel (INTC), Snap (SNAP), and Microsoft (MSFT) warning of slowing growth and sales.
If you thought mighty Apple would swoop in to save the tech industry from all of the gloom and doom, you might be in for a rude awakening. Analysts surveyed by Bloomberg expect Apple to report its first year-over-year earnings decline since 2019 in the quarter.
The last time Apple reported a decline in earnings, all Wall Street could talk about was how smartphone sales were stagnating. This time around, analysts suspect the decline is the result of both fallout from lockdowns in China and falling smartphone demand amid high inflation.
According to IDC, iPhone shipments fell 14.9% year-over-year from 85 million units in Q4 2021 to 72.3 million units in Q4 2022. The reason? Apple seemingly couldn’t get enough iPhones on store shelves thanks to the pandemic lockdowns at Foxconn’s plant in Zhengzhou, China.
But It’s not just problems getting iPhones into users’ hands, BofA Global Research’s Wamsi Mohan wrote in a recent analyst note.
“We view [the first half of 2023] as challenged given a somewhat weaker iPhone cycle (both supply and demand issues) and [the second half] will depend on the next iPhone cycle and contribution from AR/VR,” he wrote.
If Mohan is right, and Apple’s iPhone sales take a hit, the outlook for the rest of the tech industry could begin to look a bit darker.
Apple has been warning of problems ahead
During Apple’s Q4 earnings call, CFO Luca Maestri warned that while the company performed well in 2022, things would get difficult in 2023. While he didn’t provide specific guidance for the quarter, citing “continued uncertainty around the world,” he did offer a hint as to what Apple has in store in the months ahead.
Specifically, Maestri said he expects year-over-year revenue performance to decelerate. The main problem, he told shareholders, is that the company expects nearly 10 percentage points of negative foreign exchange headwinds. Mac sales, he explained, will also “decline substantially” year-over-year compared to the growth the business experienced during the pandemic.
For his part, Mohan, says he expects to see a slowdown in Services revenue thanks to the strong dollar and a decline in digital advertising growth.
Wedbush Analyst Dan Ives, meanwhile, lowered his target price for Apple’s stock from $200 per share to $174 per share, on fears that demand headwinds are beginning to “creep into the Cupertino growth story.”
Apple has avoided many of Big Tech’s problems…so far
Apple has been a standout among Big Tech companies even by pandemic-era standards. Since 2020, the iPhone maker has reported record revenue each quarter. That’s thanks to the strength of its smartphone sales, as well as growth in its Services, Wearables, and Mac businesses.
Yes, the rest of the tech industry was racking up impressive numbers, but Apple was the only one to reach a market cap of $3 trillion—it hit the milestone in Jan. 2022, just two years after hitting $2 trillion. After the selloff in tech stocks in 2022, however, Apple’s market cap was floating at about $2.2 trillion, as of Wednesday afternoon.
Still, shares of Apple have performed well relative to the company’s closest Big Tech competitors. Apple is down just 18% over the last 12 months as of Wednesday, slightly better than Microsoft, which is off 20%, but well ahead of Alphabet, which is down 26%; Amazon, down 31%; and Meta, off 52%.
Apple has also steered clear of mass layoffs so far. In November, Meta laid off 11,000 workers. Amazon, Alphabet, and Microsoft followed suit in January, cutting 18,000, 12,000, and 10,000 jobs, respectively. The reason? Apple simply hired workers slower throughout the pandemic, while companies like Amazon and Meta expanded their workforces by more than 90% since Q4 2019.
And CEO Tim Cook also took a 40% pay cut for 2023, dropping his salary to $49 million. And while Alphabet CEO Sundar Pichai also took a cut, he had to deal with layoffs as well.
Apple still has tricks up its sleeve
While Apple, like the rest of the tech industry, is staring down a potentially rough quarter, the company is expected to drop some major news in the months ahead. Sure, the company debuted new Macs in January, and we’re likely to see a new iPhone and Apple Watch later this fall, but the big news is that the company will likely announce its long-awaited mixed reality headset sometime this spring.
That alone, could provide Apple with a boost to its bottom line, though don’t expect it to replace the iPhone as Apple’s chief breadwinner for some time, if ever. For now, however, the company just needs to get through its Q1 earnings without too much pain. We’ll find out more on Thursday.