Tech giant Apple Inc. (AAPL) reported fiscal 2023 third-quarter results that surpassed Wall Street estimates for earnings and sales, driven by solid services sales that rose 8% year-on-year, reaching an all-time high.

“We are happy to report that we had an all-time revenue record in Services during the June quarter, driven by over 1 billion paid subscriptions, and we saw continued strength in emerging markets thanks to robust sales of iPhone,” said Tim Cook, Apple’s CEO.

The company’s EPS for the quarter was $1.26, compared to the $1.19 Refinitiv consensus estimate. Its revenue came in at $81.80 billion versus $81.69 billion estimated. But AAPL’s overall sales dropped 1% year-over-year, and revenue in the company’s iPhone, Mac, and iPad lineups were all down from a year ago.

Further, AAPL’s CFO Luca Maestri said on the company’s earnings call that investors could expect September quarter sales results to be similar to its June quarter performance.

Despite a decline in revenue on an annual basis, AAPL’s June quarter year-over-year business performance improved from the March quarter, and its installed base of active devices reached an all-time high in every geographic segment. The tech company monetizes its active base of over 2 billion devices by selling subscriptions, streaming TV, advertising, payment services, and other products.

“During the quarter, we generated very strong operating cash flow of $26 billion, returned over $24 billion to our shareholders, and continued to invest in our long-term growth plans,” Luca Maestri commented.

Given strategic leadership, innovative product releases, and effective marketing strategies, AAPL is well-poised for robust growth and expansion in the long run. On June 6, the company introduced Apple Vision Pro™, a revolutionary spatial computer that seamlessly blends digital content with the physical world while enabling users to stay present and connected to others.

“Just as the Mac introduced us to personal computing, and iPhone introduced us to mobile computing, Apple Vision Pro introduces us to spatial computing. Built upon decades of Apple innovation, Vision Pro is years ahead and unlike anything created before — with a revolutionary new input system and thousands of groundbreaking innovations,” said Tim Cook.

Also, on June 5, AAPL unveiled the new Mac Studio™ and Mac Pro®, the two most powerful Macs ever introduced. Mac Studio features M2 Max and the new M2 Ultra, providing a huge boost in performance and enhanced connectivity in its stunningly compact design. These innovative product launches are expected to drive the company’s profitability and growth.

However, this month, AAPL got a rare downgrade from Rosenblatt Securities analyst Barton Crockett from Buy to Neutral as the tech company continues to show no top-line growth.

Shares of AAPL have 22.2% over the past six months and 44.1% year-to-date to close the last trading session at $180.19. Moreover, the stock surged 11.7% over the past year.

Here’s what could influence AAPL’s performance in the upcoming months:

Mixed Financials

For the third quarter that ended July 1, 2023, AAPL’s total net sales decreased 1.4% year-over-year to $81.80 billion. Its operating income was $23 billion, a marginal decline year-over-year. However, the company’s gross margin grew 1.5% from the year-ago value to $36.41 billion.

Furthermore, the company’s net income and earnings per share came in at $19.88 billion and $1.26, up 2.3% and 5% year-over-year, respectively. As of July 1, 2023, AAPL’s cash and cash equivalents were $28.41 billion, compared to $23.65 billion as of September 24, 2022.

Mixed Analyst Estimates

Analysts expect AAPL’s revenue for the fourth quarter (ending September 2023) to decrease 1% year-over-year to $88.29 billion. However, the consensus earnings per share estimate of $1.39 for the current quarter indicates an increase of 7.6% year-over-year. Moreover, the company has topped the consensus EPS estimates in three of the trailing four quarters.

For the fiscal year 2023, Street expects AAPL’s revenue and EPS to decline 2.9% and 0.8% from the previous year to $382.92 billion and $6.06, respectively. The company’s revenue and EPS for fiscal year 2024 are expected to grow 6.2% and 8.5% year-over-year to $406.76 billion and $6.57, respectively.

Robust Profitability

AAPL’s trailing-12-month EBIT margin of 29.23% is 554.5% higher than the 4.47% industry average. Also, the stock’s trailing-12-month net income margin of 24.68% is 1,127.3% higher than the industry average of 2.01%. And its trailing-12-month levered FCF margin of 23.62% is 238.8% higher than the 6.97% industry average.

In addition, the stock’s trailing-12-month ROCE and ROTC of 160.09% and 40.39% are significantly higher than the industry averages of 0.62% and 2.37%, respectively. Its trailing-12-month ROTA of 28.28% compares to the industry average of negative 0.24%.

Stretched Valuation

In terms of forward non-GAAP P/E, AAPL is currently trading at 29.47x, 28.3% higher than the industry average of 22.97x. The stock’s forward EV/Sales of 7.14x is 164.3% higher than the industry average of 2.70x. In addition, its forward EV/EBITDA multiple of 21.83 is 47.1% higher than the industry average of 14.84.

Moreover, AAPL’s forward Price/Sales and Price/Cash Flow of 7.29x and 24.69x compared to the respective industry averages of 2.62x and 19.89x. The stock’s forward Price/Book multiple of 46.78 is considerably higher than the industry average of 3.90.

POWR Ratings Reflect Uncertainty

AAPL’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. AAPL has an A grade for Quality, consistent with higher-than-industry profitability.

In addition, the stock has a C grade for Stability. AAPL’s 24-month beta of 1.24 justifies its Stability grade. On the other hand, it has a D grade for Value, consistent with its higher valuation relative to its industry peers.

AAPL is ranked #19 out of 42 stocks in the Technology - Hardware industry.

Beyond what I have stated above, we have also given AAPL grades for Sentiment, Growth, and Momentum. Get all AAPL’s POWR Ratings here.

Bottom Line

While AAPL surpassed analyst expectations for revenue and earnings in the last reported quarter, its overall sales dropped. Further, the company predicted sales slump to continue in the fourth quarter of fiscal 2023.

Although the dominant tech player is well-positioned for significant growth in the long run, thanks to its strategic leadership and innovative product lineups, its near-term performance will likely be affected by weakened consumer spending amid inflationary pressures.

Given AAPL’s mixed financials, elevated valuation, and near-term bleak growth prospects, it could be wise for investors to wait for a better entry point in this tech stock.

Stocks to Consider Instead of Apple Inc. (AAPL)

Given its uncertain short-term prospects, the odds of AAPL outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Technology - Hardware industry instead:

Seiko Epson Corporation (SEKEY)

Spirent Communications plc (SPMYY)

TransAct Technologies Incorporated (TACT)

To explore more A and B-rated hardware stocks, click here.

What To Do Next?

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AAPL shares fell $0.09 (-0.05%) in premarket trading Tuesday. Year-to-date, AAPL has gained 39.27%, versus a 16.65% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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