Apple: A "money tree" with zero growth, worth 30 times PE?

Apple (AAPL.O) released its fiscal fourth-quarter earnings report for 2023 (ending in September 2023) after the US stock market on November 3, 2023.

Overall Performance: Making Steady Profits. In this quarter, Apple achieved a revenue of $89.5 billion, a YoY decrease of 0.7%, which is basically in line with market expectations ($89.31 billion). The decline in revenue was mainly due to the insufficient demand for Mac and iPad businesses. Apple's gross margin was 45.2%, an increase of 2.9 percentage points YoY, slightly exceeding market expectations (44.5%). Among them, the software gross margin has remained above 70% for 9 consecutive quarters.

iPhone: Continuously Outperforming the Industry. In this quarter, the global smartphone market stopped declining, while Apple's iPhone business continued to outperform the overall industry. Dolphin Research estimates that the average selling price of Apple's smartphones in this quarter has slightly decreased but is still at a historically high level compared to the same period.

Other Hardware Besides iPhone: Poor Performance and Weak Demand. Mac, iPad, and other hardware businesses all experienced varying degrees of YoY decline in this quarter. The most disappointing performance was the Mac business, with quarterly revenue of $7.6 billion, far below market expectations ($8.77 billion). Although the hardware business has rebounded MoM, the poor performance is still affected by weak demand.

Software Services: Steady Growth. The revenue of software services in this quarter was $22.3 billion, surpassing Bloomberg's consensus expectations ($21.38 billion) again. Software services remain the most stable part of the company, with continuous business growth. The revenue growth rate of Apple's software services in this quarter has once again returned to double digits.

Overall View: Apple's earnings report this time is still good. Apple's revenue in this quarter met market expectations, and the profit side significantly exceeded market expectations. The largest item of revenue, the smartphone business, has begun to stabilize and rebound. The continuous growth of software services can also structurally improve the company's gross margin. Therefore, the company achieved double-digit profit growth on the basis of no revenue growth.

However, can such an earnings report bring confidence to the market? Actually, it cannot. The weakness in the hardware side makes it difficult to achieve growth in revenue. In a situation where downstream demand is relatively weak, iPad, Mac, and other hardware businesses all experienced YoY decline in this quarter. The company also expects that "next quarter, iPad and wearable businesses will experience significant decline, while Mac and iPhone will grow, but total revenue will remain basically flat compared to the same period last year."

The current electronic product market is showing signs of recovery, but Apple itself has not demonstrated strong alpha compared to the growth of Android and Huawei. Although profits are still growing, they mainly come from the structural improvement brought by the software business. However, if the hardware business fails to gain momentum, the sustainability of the software business growth will also be affected.

Considering Apple's current market value, such an earnings report and expectations will inevitably put pressure on the company's stock price. Although the company is still a stable "cash cow" in terms of profits, the lack of growth prospects will directly impact the company's valuation.

For Dolphin Research's specific analysis of Apple's earnings report, please see the following:

I. Overall Performance: Steady Profitability

1.1 Revenue: In the fourth quarter of the 2023 fiscal year (3Q23), Apple achieved revenue of $89.5 billion, a year-on-year decline of 0.7%, which is basically in line with Bloomberg's consensus expectation ($89.31 billion). The slight decline in revenue this quarter is mainly due to the insufficient demand for Mac and iPad businesses.

From the perspectives of hardware and software:

• Apple's hardware business growth rate this quarter was -5.3%. The main reason for the decline in the hardware side this quarter is the overall decline in Mac and iPad businesses. Although the Mac business has rebounded MoM, it has experienced a significant YoY decline.
• Apple's software business grew by 16.3% this quarter, with a significantly accelerated growth rate. The software business has a certain degree of risk resistance. Under the decline in hardware revenue, software services have returned to double-digit growth.

From a regional perspective: In this quarter, Apple has halted the decline in the American market, while other regions have experienced varying degrees of decline. The Americas is the largest source of Apple's revenue, with a YoY growth of 0.8% this quarter, while Europe and Greater China experienced declines of -1.5% and -2.5% respectively.

1.2 Gross Margin: In the fourth quarter of the 2023 fiscal year (3Q23), Apple's gross margin was 45.2%, an increase of 2.9 percentage points YoY, slightly exceeding Bloomberg's consensus expectation (44.5%). The company's gross margin continued to rise this quarter, mainly due to the increased proportion of software business with higher gross margins, which structurally raised the company's overall gross margin. Dolphin Research's analysis of Apple's software and hardware gross profit margins:

Apple's software gross profit margin this quarter continues to stabilize above 70%. The market's main concern is still the level of gross profit margin on the hardware side, which has also rebounded this quarter to 36.6%. The rebound in hardware gross profit margin is mainly due to the company's control over costs.

1.3 Operating Profit: Apple's operating profit for the fourth quarter of fiscal year 2023 (3Q23) was $27 billion, an 8.3% increase YoY. The increase in Apple's operating profit this quarter is mainly due to the improvement in gross profit margin.

Apple's operating expense ratio this quarter was 15%, a 0.4% increase YoY. The company's sales and research and development expenses performed relatively steadily this quarter.

II. iPhone: Continuously Outperforming the Overall Industry

iPhone business revenue for the fourth quarter of fiscal year 2023 was $43.8 billion, a 2.8% increase YoY, basically in line with Bloomberg's consensus expectation ($43.65 billion). This quarter, global smartphone shipments were basically flat YoY, while the company's mobile phone business performed slightly better than the overall market.

Dolphin Research examines the main sources of growth for the iPhone business this quarter in terms of quantity and price relationship:

1) iPhone shipments: According to IDC's data, the global smartphone market grew by 0.3% YoY in the third quarter of 2023. Apple's shipment growth rate this quarter is around 3.3%, outperforming the overall market;

2) iPhone average selling price: Combining iPhone business revenue and shipments, the average selling price of iPhones this quarter is around $817, a 0.5% decrease YoY. The release of the iPhone 15 series this year was slightly later than the previous generation, which to some extent affected the performance of the average selling price.

III. Other Hardware Outside of iPhone: Poor Performance and Weak Demand

3.1 Mac Business

In the fourth quarter of the 2023 fiscal year, the Mac business generated $7.6 billion in revenue, a YoY decline of 33.8%, which was lower than market expectations ($8.77 billion).

According to IDC's report, global PC shipments in this quarter declined by 7.6% YoY, while Apple's Mac shipments in the same quarter declined by over 20%. The significant decline in Mac business this quarter was mainly due to strong inventory replenishment demand from channel partners in the same period last year.

On a MoM basis, the Mac business showed some recovery. Dolphin Research believes that after a long period of destocking in the overall PC industry, it has gradually started to rebound. The performance of Apple's Mac business this quarter is relatively normal during this weak phase.

3.2 iPad Business

In the fourth quarter of the 2023 fiscal year, the iPad business generated $6.4 billion in revenue, a YoY decline of 10.2%, slightly better than Bloomberg's consensus expectations ($6.14 billion). The overall demand for the iPad business is still weak, leading to continued low revenue.

3.3 Other Hardware, such as Wearables

In the fourth quarter of the 2023 fiscal year, the revenue from other hardware, including wearables, was $9.3 billion, a YoY decline of 3.4%, slightly lower than Bloomberg's consensus expectations ($9.43 billion). Apple's wearables and other hardware business continued to decline this quarter, partly due to the delayed impact of the autumn product launch compared to the same period last year, and the overall market demand remains relatively weak.

IV. Software Services: Steady Growth

In the fourth quarter of the 2023 fiscal year, software services generated $22.3 billion in revenue, a YoY growth of 16.3%, exceeding Bloomberg's consensus expectations ($21.38 billion). The software business is the most robust part, showing a continuous growth trend. Apple's software services revenue growth rate has returned to double digits this quarter. With the relatively improved macroeconomic situation, consumers' willingness to pay has also rebounded.

In terms of software services, the gross profit margin level is the most concerning. In this quarter, the gross profit margin of software services reached 70.9%, maintaining above 70% for 9 consecutive quarters. The software services business, which has steadily growing high-profit attributes, has become an important component of the company's profits.

Dolphin Research's historical articles on Apple:

Earnings Season

August 4, 2023, Earnings Report Review: "Apple: Barely Holding On, Reliant on India for Salvation?"

August 4, 2023, Conference Call: "India Market Sets New Records (Apple FY23Q3 Conference Call)"

May 5, 2023, Earnings Report Review: "Apple: Turning the Tide Against the Headwinds, the True 'King of Machines'"

May 5, 2023, Conference Call: "Apple's Turnaround Against the Headwinds, Is It All Thanks to Emerging Markets like India? (Apple FY2023Q2 Conference Call)"

February 3, 2023, Earnings Report Review: "Apple: Finally Facing the Thunder That Has Been Looming"

February 6, 2023, Conference Call: "Limited Impact on Demand, Guidance Boosts Confidence Again (Apple FY2023Q1 Conference Call)"

October 28, 2022, Conference Call: "Apple: Not Thriving in the Peak Season, Can the 'Roll King' Escape Decline? (FY2022Q4 Conference Call)"

October 28, 2022, Earnings Report Review: "Apple: The Only Giant Still Standing, How Much Longer Can It Last?" On July 29, 2022, Phone Conference "What will the management explain with only iPhone business left (Apple phone conference)" and Financial Report Review "The barely growing iPhone unexpectedly became the last fig leaf for Apple".

On April 29, 2022, Phone Conference "Multiple factors hinder, Apple gives a weak guidance (Phone conference summary)" and Financial Report Review "Apple, who earns crazy money, should worry about growth! ｜Earnings season".

On January 28, 2022, Phone Conference "Apple: Supply crisis eased, innovation ignited true technology (phone conference summary)" and Financial Report Review "Apple's hard power, sweet and fragrant again | Reading financial reports".

On October 29, 2021, Phone Conference "What did Apple management communicate after the performance expectations fell short?" and Financial Report Review "Embarrassed Answer Sheet of Apple After Expectations Fell Short".

On July 28, 2021, Phone Conference "Apple's interpretation of management after the five events exceeded expectations (with the full Q&A)" and Financial Report Review "Apple: The definition of excellence, five events exceed expectations".

On April 29, 2021, Phone Conference "Apple 2021 Q2 Performance Conference Summary" and Financial Report Review "Excellent companies always exceed expectations, and the new financial quarter of Apple is tough enough!".2021 年 4 月 25 日财报前瞻《A Sneak Peek at the Q1 Earnings Report: Will Apple's New Quarter Continue to Soar?》

深度

2022 年 12 月 29 日《Semiconductor Avalanche? True Resilience Comes After the Most Brutal Decline》

2022 年 11 月 11 日《Good Performance but Still Falling: Is Apple Really Sweet?》

2022 年 6 月 17 日《Consumer Electronics "Ripe and Mature": Apple Stands Strong, Xiaomi Struggles》

2022 年 6 月 6 日《Major Shock in the US Stock Market: Were Apple, Tesla, and NVIDIA Wrongly Killed?》

2022 年 2 月 28 日《Apple: Transferring Cost Pressure, We Salute You!》

2021 年 12 月 6 日《Apple: Dual-Driven Growth Losing Steam, Urgent Need for Strong Hardware Products》

直播

2022 年 9 月 8 日《Apple 2022 Autumn Event》

2022 年 4 月 29 日《Apple Inc. (AAPL.US) Q2 2022 Earnings Conference Call》

2022 年 1 月 28 日《Apple Inc. (AAPL.US) Q1 2022 Earnings Conference Call》

2021 年 10 月 29 日《Apple Inc. (AAPL.US) Q4 2021 Earnings Conference Call》

2021 年 10 月 19 日《Apple October Product Launch Event》2021-09-15: Apple 2021 Autumn Event

2021-07-28: Apple (AAPL.US) 2021 Q3 Earnings Call

2021-04-29: Apple (AAPL.US) 2021 Q2 Earnings Call

2021-04-21: Apple Spring New Product Launch Event

Risk disclosure and statement in this article: Disclaimer and General Disclosure of Dolphin Investment Research