Why does "lying flat" Apple enjoy a 30 times PE ratio?

On the early morning of February 2, 2024, Beijing time, Apple (AAPL.O) released its fiscal first-quarter earnings report for 2024 (ending in December 2023) after the US stock market closed.

Overall Performance: Revenue & Gross Margin, slightly exceeding expectations. In this quarter, Apple achieved revenue of $119.6 billion, a year-on-year increase of 2.1%, slightly exceeding the market consensus of $118 billion. The revenue growth was mainly driven by Apple and services. Apple's gross margin was 45.9%, a year-on-year increase of 2.9 percentage points, slightly exceeding the market consensus of 45.5%. Among them, the software gross margin has remained above 70% for 10 consecutive quarters.

Apple: Growth, but no alpha. The global smartphone market's shipment volume rebounded to single-digit growth this quarter, and Apple's performance in the Apple business was similar to the overall industry. Dolphin Research estimates that Apple's average selling price of smartphones in this quarter has slightly decreased, mainly due to competition in the Greater China region, which directly affected product sales performance and subsequently the average selling price.

Other Hardware besides Apple: Basically in line with expectations. Other hardware businesses such as iPad and wearables all experienced double-digit year-on-year declines this quarter, which was the biggest drag on the company this quarter. Insufficient terminal demand directly affected the performance of the hardware segment.

Software Services: Setting new records. The revenue of software services in this quarter was $23.1 billion, close to market expectations ($23.37 billion). Both the revenue and gross margin of the software business reached new highs this quarter. Software services remain the most robust part of the company, with continued business growth. Even in the case of limited growth in the hardware segment, the company's software business still achieved double-digit growth.

Overall view: The Apple earnings report looks good. Both revenue and gross margin slightly exceeded market expectations. Looking at the various business segments, the Apple business exceeded expectations, and the revenue of other business segments also basically met market expectations. Benefiting from the compression of hardware costs, the company's overall profitability continues to rise.

However, this earnings report does not bring confidence to the market: although the gross margin continues to rise, there is no growth momentum on the revenue side. The overall demand in the hardware segment remains weak, and Apple cannot find alpha in the smartphone market. Especially in the Greater China region, facing competition from Android and Huawei manufacturers, the regional revenue in this quarter has even experienced a double-digit decline. With pressure on the hardware segment, the growth rate of the software business will also be affected. Although the overall financial report data slightly exceeded market expectations, it also reveals the pressure the company is currently facing. As for the recent policy adjustments in the European Union software services, the overall impact is not significant, as the European Union region accounts for about 7% of Apple's app revenue. The improvement in profitability is expected to drive the company's profits, but the lack of demand and hidden competitive risks may not be able to support Apple's current P/E ratio of nearly 30 times.

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

I. Overall Performance: Revenue & Gross Margin, slightly exceeding expectations

1.1 Revenue: In the first quarter of fiscal year 2024 (4Q23), Apple achieved revenue of $119.6 billion, a year-on-year increase of 2.1%, slightly exceeding the market consensus expectation ($118 billion). The slight increase in revenue this quarter was mainly driven by the growth in Apple and services revenue.

From the perspectives of hardware and software:

Apple's hardware business growth rate this quarter was 0.1%. The performance of the hardware segment this quarter was mainly driven by the growth in Apple's revenue, offsetting the decline in hardware such as iPad and wearables.
Apple's software business grew by 11.3% this quarter, maintaining double-digit growth. The software business has a certain risk resistance. Even in the case of relatively sluggish hardware revenue, software services continue to grow.

Looking at different regions: Apple's revenue in Greater China showed a significant decline this quarter, while revenue in other regions increased to varying degrees. This is mainly due to intensified competition in the Greater China region and the recovery of Android brands. Specifically, the Americas and Europe are Apple's top two sources of revenue, with growth rates of 2.1% and 9.8% respectively this quarter, while Greater China experienced a decline of 12.9%.

1.2 Gross Margin: In the first quarter of fiscal year 2024 (4Q23), Apple's gross margin was 45.9%, an increase of 2.9 percentage points compared to the same period last year, slightly exceeding market expectations (45.5%). The company's gross margin continued to rise this quarter, mainly due to the increase in gross margin on the hardware side.

Dolphin Research breaks down the gross margin of software and hardware as follows:

Apple's software gross margin this quarter remained stable at above 70%. However, the market is still most concerned about the level of gross margin on the hardware side, which has reached a historical high of 39.4%. The rebound in hardware gross margin is mainly due to the company's control over costs.

1.3 Operating Profit: In the first quarter of the 2024 fiscal year (4Q23), Apple's operating profit reached $40.4 billion, a YoY increase of 12.1%. The increase in Apple's operating profit this quarter was mainly due to the improvement in gross profit margin.

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

2.iPhone: Growth, but no alpha

In the first quarter of the 2024 fiscal year, Apple's business revenue reached $69.7 billion, a YoY increase of 6%, slightly exceeding market expectations ($65.8 billion). The global smartphone market saw a single-digit YoY growth in shipments this quarter, and the company's performance in the mobile phone business was similar to the overall market.

From the perspective of quantity and price, Dolphin Research identified the main sources of growth for Apple's business this quarter:

1) Apple's shipment volume: According to IDC data, the global smartphone market saw a YoY growth of 8.6% in the fourth quarter of 2023. Apple's shipment volume this quarter grew at a rate of around 11.3%, slightly outperforming the overall market.

2) Apple's average selling price: Based on Apple's business revenue and shipment volume, the average selling price of Apple's products this quarter was around $866, a YoY decrease of 4.8%. With the release of new models, Apple's average selling price showed a slight increase MoM. However, due to competition in the Greater China region, it directly affected product sales performance and subsequently impacted the average selling price.

3. Other Hardware Businesses Except for Apple: Meeting Expectations

3.1 Mac Business

In the first quarter of fiscal year 2024, the Mac business revenue reached $7.8 billion, a YoY growth of 0.6%, which is in line with market expectations ($7.9 billion).

According to IDC's report, the global PC market shipments declined by 0.3% YoY this quarter, while Apple's shipments declined by nearly 20% YoY. The significant decline in Mac business this quarter is mainly due to ① the channel partners' inventory replenishment demand in the same period last year, and ② the current market demand remains weak.

3.2 iPad Business

In the first quarter of fiscal year 2024, the iPad business revenue reached $7 billion, a YoY decline of 25.3%, which is in line with market expectations ($7.06 billion). The overall downstream demand for the iPad business is weak, leading to continued low revenue. New products are still needed to drive growth.

3.3 Wearables and Other Hardware

In the first quarter of fiscal year 2024, the revenue of wearables and other hardware business reached $12 billion, a YoY decline of 11.3%, which is in line with market expectations ($12.02 billion). Apple's wearables and other hardware business continued to decline this quarter, mainly due to weak market demand for wearable products. Considering Qualcomm's YoY decline of 32% in the IoT business, the overall market performance remains sluggish.

4. Software Services: Setting New Records

In the first quarter of fiscal year 2024, the revenue of software services reached $23.1 billion, a YoY growth of 11.3%, which is in line with market expectations ($23.37 billion). The software business is the most robust part, showing continuous growth. Despite the limited growth in hardware, software services still achieve double-digit growth, mainly due to the increase in revenue from individual user services.

In software services, the gross margin level is the most concerning. In this quarter, the gross margin of software services reached 72.8%, setting a new historical high and maintaining above 70% for 10 consecutive quarters. The software services business, with steadily growing high-margin attributes, is an important component of the company's profits.

Dolphin Research Apple Historical Article Review:

Earnings Season

November 3, 2023 Conference Call: "Apple: A Quarter with No Highlights (FY23Q4 Conference Call)"

November 3, 2023 Earnings Review: "Apple: A 'Money Tree' with Zero Growth, Worth 30 Times PE?"

August 4, 2023 Earnings 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 Review: "Apple: Turning the Tide Against the Headwinds, the True 'King of Devices'"

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 Review: "Apple: The Thunder That Has Been Looming Finally Strikes"

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

October 28, 2022 Conference Call: "Apple: The Season of Prosperity is Not So Prosperous, Can the 'Roll King' Escape the Decline? (FY2022Q4 Conference Call)"

October 28, 2022 Earnings Review: "[Apple: The Only Giant That Hasn't Fallen, How Much Longer Can It Last?](https://longbridgeapp.com/en/topics/3584113?" On July 29, 2022, a conference call was held titled "Only Apple's Business to Cover Up, How Will the Management Explain? (Apple Conference Call)".

On July 29, 2022, a financial report review was conducted titled "Apple, the Unexpected Savior for Apple's Growth (Financial Report Review)".

On April 29, 2022, a conference call was held titled "Multiple Factors Troubling Apple, Soft Guidance Given (Conference Call Summary)".

On April 28, 2022, a financial report review was conducted titled "Apple, Crazy Profit Maker, Worries About Growth! | Earnings Season".

On January 28, 2022, a conference call was held titled "Apple: Supply Crisis Eases, Innovation Ignites True Technology (Conference Call Summary)".

On January 28, 2022, a financial report review was conducted titled "Apple's Solid Strength, Sweet and Fragrant | Reading Financial Reports".

On October 29, 2021, a conference call was held titled "After Failing to Meet Performance Expectations, What Did Apple's Management Discuss?".

On October 29, 2021, a financial report review was conducted titled "Missed Expectations, Apple's Answer Embarrassing".

On July 28, 2021, a conference call was held titled "Apple's Management Interpretation After Exceeding Expectations in All Aspects (Including Full Q&A)".

On July 28, 2021, a financial report review was conducted titled "Apple: Definition of Excellence, Exceeding Expectations in All Aspects".

On April 29, 2021, a conference call was held titled "Apple 2021Q2 Performance Summary". Earnings Report Analysis on April 29, 2021: "Outstanding companies always exceed expectations, Apple is tough in the new fiscal quarter!" (Link: https://longbridgeapp.com/news/34578989)

Earnings Report Preview on April 25, 2021: "After an impressive quarterly report, will Apple's new fiscal report continue to perform explosively?" (Link: https://longbridgeapp.com/news/34167490)

In-depth Analysis on December 29, 2022: "Semiconductor Avalanche? True resilience only comes after a severe decline." (Link: https://longportapp.com/en/topics/3805995)

On November 11, 2022: "Even with good performance, does Apple really taste sweet?" (Link: https://longbridgeapp.com/en/topics/3638189)

On June 17, 2022: "Consumer Electronics 'Ripe', Apple stands strong while Xiaomi endures hardship." (Link: https://longbridgeapp.com/topics/2917540)

On June 6, 2022: "Major turbulence in the US stock market, were Apple, Tesla, and NVIDIA wrongly hit?" (Link: https://longbridgeapp.com/topics/2758465)

On February 28, 2022: "Apple: Passing on cost pressures, we salute you!" (Link: https://longbridgeapp.com/news/56609825)

On December 6, 2021: "Apple: Dual-wheel drive gradually shows weakness, 'limping' hardware urgently needs a strong product continuation." (Link: https://longbridgeapp.com/news/51510803)

Live Broadcasts:

On September 8, 2022: "Apple 2022 Autumn Launch Event." (Link: https://longbridgeapp.com/lives/115957?channel=n115957)

On April 29, 2022: "Apple (AAPL.US) 2022 Q2 Earnings Conference Call." (Link: https://longbridgeapp.com/lives/6757?channel=n6757)

On January 28, 2022: "Apple (AAPL.US) 2022 Q1 Earnings Conference Call." (Link: https://longbridgeapp.com/lives/6757?channel=n6757)

On October 29, 2021: "Apple (AAPL.US) 2021 Q4 Earnings Conference Call." (Link: https://longbridgeapp.com/lives/3097?channel=nl3097&invite-code=032064)

Apple October 2021 Product Launch Event on October 19, 2021

Apple 2021 Autumn Product Launch Event on September 15, 2021

Apple (AAPL.US) Q3 2021 Earnings Conference Call on July 28, 2021

Apple (AAPL.US) Q2 2021 Earnings Conference Call on April 29, 2021

Apple Spring Product Launch Event on April 21, 2021

Risk disclosure and statement for this article: Dolphin Research Disclaimer and General Disclosure