“Apple has already steered down expectations for its third-quarter results but analysts and shareholders will be looking for reassurance from both this set of numbers and any guidance for the fourth quarter, as financial markets look for support from the heavyweight technology stocks that did so much to take them higher (and higher) during the pandemic,” says AJ Bell Investment Director Russ Mould. “Analysts are forecasting a 12% drop in third-quarter earnings per share to $1.15 but then expect a return to growth, with a 4% advance to $1.30 in the company’s fiscal fourth quarter to September.
Source: Company accounts, Zack’s, NASDAQ, analysts’ consensus
“Alongside April’s second-quarter numbers, which reassured with a 9% increase in sales, a 10% gain in EPS and another $26 billion on dividends and share buybacks, chief financial officer Luca Maestri warned that earnings could take a $4 billion to $8 billion hit from a range of issues.
“These included silicon chip shortages, the withdrawal from Russia, currency movements and weaker demand due to lockdowns in China. Analysts will look for comments on all of these issues as the company enters its fiscal fourth quarter and gets ready for the all-important fiscal first quarter of 2022-23, as that includes the key Thanksgiving and Christmas seasons in the western hemisphere.
“The war in Ukraine goes on, the dollar is still going up and the outlook for Chinese smartphone sales remains cloudy, so it may be unwise to expect too much relief in the fourth quarter.
“Last week’s weak earnings from America’s largest wireless telecoms operator hardly inspired confidence in another major market, either, especially as the company flagged a huge bulge in smartphone inventories on its balance sheet. That suggests the firm may slow down its device orders in the second half, unless demand suddenly improves.
Source: Refinitiv data
“It is possible that Apple will – once again - overcome the challenges that face it by generating higher-than-expected sales from its high-margin operations.
“They excelled again in the second quarter as services revenues rose 17% year-on-year to $19.8 billion, a figure greater than sales from iPads and iMacs combined. Sceptics may wonder whether cash-strapped consumers will start to cut down on streaming services and paid-for downloads, but there is little sign of that at Apple at least, even if key rivals are finding the going a lot tougher, to again demonstrate the power of the app and developers’ ecosystem.
Source: Company accounts. Fiscal year to September.
“Some of the hardware businesses are showing signs of a slowdown, as iPhone sales grew just 6% year-on-year and iPad sales dropped by 16% in the second quarter to the end of March. Slower upgrade cycles may result if consumers do start to cut back on discretionary spending, a trend which the gloomy picture painted by Verizon may affirm, while component shortages could be an ongoing problem here, too.
Source: Company accounts. Fiscal year to September.
“But those services operations continue to drive cash flow, too. Apple generated another $18 billion of operating free cash flow in the second quarter and rewarded investors with $22.6 billion on buybacks and $3.6 billion of dividends. Another $90 billion share buyback programme was also given the green light, adding to the $612 billion Apple has already returned through dividends and buybacks since autumn 2012.
Source: Company accounts. Fiscal year to September.
“That number looks phenomenal in relation to the current market cap of $2.5 trillion, let alone the company’s $600 billion price tag back in October 2012 when Apple began to return cash for the first time.
“Those numbers may persuade many long-term holders to stick with the stock, but that monster market capitalisation means that Apple trades on around 25 times forward earnings for the year to September 2022.
“Slowing earnings growth – if only due to the law of large numbers given how net income is forecast to reach $100 billion in the current fiscal year – could leave such a lofty price tag looking exposed, especially as it represents a hefty premium to the wider US equity market.
“Analysts’ consensus forecasts are looking for 6% EPS growth in fiscal 2023 and 5% in 2024. Given the high base that would still be an amazing achievement, but whether it is enough to sustain such a high rating for the shares remains to be seen, even allowing for the cash returns.”
