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Apple Earnings To Show Weaker Demand, But Stock Remains A Favorite Growth Play

Published 27/07/2022, 17:08
  • Reports Q3 2022 results on Thursday, July 28, after the market close
  • Revenue Expectation: $82.59 billion; EPS: $1.16
  • Apple may face slowing demand for its products as consumers brace for a tough time
  • When Apple Inc. (NASDAQ:AAPL) releases its latest quarterly earnings tomorrow, investors' primary focus will turn to the iPhone maker's ability to maintain growth momentum at a time when surging interest rates, a four-decade high inflation, and a threat of a recession are hurting consumer confidence.

    The Cupertino, California-based Apple is a better play in an adverse economic backdrop mainly due to its wealthy and loyal consumer base—often seen as more resilient to macroeconomic headwinds. Still, the US's most valuable company can't claim to be completely immune from the economic headwinds.

    Shares of Apple have weakened about 13% this year amid a broad market selloff. Still, this performance is much better than most of Apple's mega-cap counterparts, and the benchmark NASDAQ 100AAPL Weekly Chart

    Dwindling Demand

    Taiwan Semiconductor Manufacturing (NYSE:TSM), Apple's leading supplier of processors, recently warned that demand for PCs, smartphones, and consumer electronics is weakening amid inflationary pressures and after the pandemic-driven boom. However, Apple is likely to be less affected because the high-end market, where it sells, has been more resilient.

    The company's fiscal third quarter results are expected to show a deceleration in sales growth. Analysts predict revenue will climb by about 2% from a year earlier, the slowest pace since 2020. Compare that with the 36% jump that Apple saw in the third quarter of 2021 when the pandemic-induced demand was fueling sales.

    Analysts also expect $1.16 in earnings per share, which would be a 10.7% decline annually. The company said in April that gross margin should also decline from 43.7% last quarter to between 42% and 43%.

    China Disruptions

    Slowing consumer demand isn't the only threat to this earnings report. During the past quarter, Apple also faced some COVID-related restrictions in China, a country with a massive assembly line and Apple's second-largest market.

    In April, Apple warned it could lose between $4 billion and $8 billion in revenue from supply issues, including chip shortages and production snags.

    These factors, including the weakening consumer demand and a strong US dollar, have led Morgan Stanley, Wells Fargo, and other banks to cut their stock price targets for Apple by about $10 a share.

    Nonetheless, the majority of analysts surveyed by Investing.com still rate Apple stock a buy, implying a near 16.5% upside potential from current levels.

    AAPL Consensus Estimates

    Source: Investing.com

    According to JPMorgan's analysts in a recent note:

    "We believe the resilience of the earnings estimates in the backdrop of macro deterioration, including both inflation and adverse FX, will continue to drive investors to prefer Apple with strong cash generation and balance sheet that will allow it to offset any earnings dilution on account of the macro through buybacks."

    In April, Apple's board authorized $90 billion in additional share buybacks and dividends.

    With the strength of its balance sheet and a robust capital-return program, Apple also has a strong lineup of new products in the coming months that could keep recession-weary consumers lured and revenue rolling in.

    These products include iPhone 14 models, a new Apple Watch SE, an updated HomePod, a new Apple TV, updated iPad Pro models with an M2 chip, the long-anticipated mixed-reality headset, and a larger, 15-inch MacBook Air.

    Bottom Line

    Apple earnings may feel the blow of a worsening economy and more cautious consumers. Despite this weakness, the company's stock remains one of the best names to own due to its strong cash-return plan and ability to bounce back quickly once the sailing gets smooth.

    Disclosure: The writer is long on Apple.


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