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By Brian Nelson, CFA
On May 4, Apple (AAPL) reported second-quarter results for its fiscal 2023 for the period ending April 1, 2023, that were slightly better than consensus forecast, but we’re viewing the report as mixed. Revenue dropped 2.5% in the quarter on a year-over-year basis as better-than-expected resilience in iPhone sales could not offset weakness in Mac and iPad performance, and its quarterly EPS of $1.52 was unchanged from last year’s mark. Revenue in the company’s Services business jumped 5.4%, and the iPhone maker announced a $90 billion buyback program as it upped its quarterly dividend by more than 4%, to $0.24 per quarter. We plan to make a few tweaks to our valuation model of Apple, but we don’t anticipate a material change to our fair value estimate.
The market looked past concerns that Apple experienced its first quarterly revenue decline in some time during the second quarter of its fiscal 2023, as Apple’s operations remain diversified across the consumer electronics spectrum. Its growing ecosystem is also bolstered by a high-margin Services business that continues to expand at a very nice and measured clip, posting an all-time record in revenue during the most recent quarter. The weakness in quarterly Mac sales could have been expected based on recent IDC data (and difficult comparables due to the rollout of the M1 chip last year), but the resilience in iPhone sales thanks in part to the long battery life and powerful camera of the iPhone 14 and iPhone 14 Plus and the strength in its Services operations made the quarterly results good enough to stymie any potential sell-off in shares. In today’s market, “good enough” is great, as investors continue to work through the implications of ongoing bank failures on the broader economy, the latest being First Republic (FRC) (FRCB), which was absorbed by J.P. Morgan (JPM).
Would we be interested in “adding” Apple to the newsletter portfolios at current levels? Well, for starters, Apple is already a “position” in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, but to answer the question: Yes, even as it bumps against the high end of the fair value estimate range. It’s simply hard not to own Apple these days, in our view, even if only on an equal-weight basis. The iPhone-making giant accounts for a large weighting in the S&P 500 (SPY), and where Apple goes, so goes the market. The company’s influence across the semiconductor (SMH) supply chain, the area of big cap tech (XLK), and the stylistic exposure of large cap growth (SCHG) is considerable, and for the market’s sake, we like that the tried-and-true stalwart is at the top of most key indices. We continue to prefer the area of large cap growth over small cap value, a view that has led to considerable alpha since the release of the book Value Trap in late 2018.
Though Microsoft (MSFT) continues to lead the next great platform in artificial intelligence [AI], in our view, we don’t think Apple will be far behind given its thirst for innovation, vast ecosystem and loyal installed base, which continues to reach all-time highs. All told, Apple is a “keeper.” Its results for the second quarter of fiscal 2023 showed a revenue decline and flat earnings per share on a year-over-year basis, but things could have been a lot worse given headwinds from China and inflationary pressures on the consumer. Apple’s new buyback announcement and dividend raise were welcome news, and we expect the company to make the most of AI across its product line-up in coming years as it hauls in gobs and gobs of free cash flow. Apple’s balance sheet remains solid, too, with the firm showcasing a net cash position of ~$57 billion at the end of the quarter.
We like shares of Apple, and the market does, too. We expect to update our reports on the company soon.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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