Apple: Misguided Earnings Rally

Summary:

• Apple rallied following an FQ2’23 earnings beat, though revenues fell 2.5% from prior-year levels.
• The tech giant guided to weak FQ3 numbers with an estimate for a similar revenue decline for the June quarter.
• AAPL stock has now rallied near all-time highs, pushing the forward PE multiple to 29x EPS estimates.

The amazing aspect of the Apple (NASDAQ:AAPL) investment story is that most investors, and even some analysts, don’t focus on the actual relative numbers of the quarterly reports. The tech giant jumped after the company beat analyst estimates for the March quarter, though the numbers weren’t overly impressive compared to prior year levels. My investment thesis remains ultra Bearish on the stock at $174 trading close to all-time highs and retesting recent highs.

FQ2 Wasn’t Good

Stock market psychology always plays out in an interesting way. One company can report negative sales and the stock plunges while another company can be loved despite a weak outlook.

Apple reported the following numbers for FQ2’23 compared to analyst estimates based on guidance provided by management:

The stock surged 5% on the first trading day following earnings due primarily to some excitement over Apple beating estimates. In reality, the tech giant beat sales estimates by $2 billion, but the company actually reported sales dipped 2.5% YoY.

CEO Tim Cook definitely provided some upbeat data points on the earnings call. A lot of people saw the numbers regarding India as very positive and the country offers a lot of growth opportunities over the decade ahead both in sales and crucial iPhone production moving away from China.

If Apple signaled a bottom in the cycle, the stock rallying from weakness could make a lot of sense. The problem is that Apple trades similar to a stock with 20% growth for years into the future, not one struggling to even grow.

FQ3 Will Be Similarly Bad

On the FQ3’23 earnings call, CFO Luca Maestri made the following revenue guidance:

We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter.

Apple just reported a March quarter where revenues dipped 2.5% YoY and analysts were forecasting the company would report FQ3 revenue growth in the 1.6% range. Analysts had revenue targets of $84.3 billion for the quarter heading into the FQ2 print and the estimates have now been cut to only $81.5 billion.

The ironic part is that investors generally have completely ignored what normally would’ve been seen as horrible guidance. The CFO just predicted revenues would be $2.8 billion below the analyst estimates going into the quarter.

A big key here is that Apple provides percentages compared to the prior quarter and not hard set numbers probably confusing investors. Either way, Apple is back to expecting revenues to dip during the June quarter and reinforcing the weak orders predicted by QUALCOMM (QCOM).

The amazing part is that influential Wedbush analyst Dan Ives actually claimed this quarter was a Lebron-like type quarter in a suggestion the quarter was very strong. Lebron James is the leading scorer in NBA history now, yet Apple just reported a quarter where sales dipped and predicted another weak quarter.

In our view, this view point reinforces the opinion that the market is very disconnected from the reality with Apple.

Big Tech Disconnect

The crazy part is that Apple comes out of the earnings trading near the highest forward PE multiple of the tech giant group that includes Alphabet (GOOG, GOOGL), Meta Platforms (META), and Microsoft (MSFT). Apple now trades at over 29x forward earnings with Microsoft only slightly topping Apple at 32x.

These tech stocks have the following forecasted revenue growth rates for FY23:

• Apple: -1.9%
• Alphabet: 5.8%
• Meta Platforms: 8.3%
• Microsoft: 6.5%

While the other tech giants are battling out for the leading growth rate for this year in the 6% to 8% range, Apple is still struggling to return to growth. In a normal market, the forward PE multiples would generally lineup with the growth rates.

One can definitely make the case that all of these tech stocks have valuation multiples disconnected with growth rates, but Apple is the great outlier. Alphabet and Meta can make the case of returning to double digit growth to warrant their PE multiples and Microsoft has a stronger recurring revenue stream to warrant a higher PE multiple, though over 30x is very excessive.

Apple is set to struggle growing just in the mid-single digits range, yet the stock is priced like the company has 20% growth ahead.

Takeaway

The key investor takeaway is that AAPL stock rally following the weak FQ2 numbers and disappointing FQ3 guidance is perplexing. The market appears more focused on whether Apple beat lowered guidance than whether the company is growing.

Investors should use this rally to unload Apple at such an optimal price.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of QCOM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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