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Apple Earnings Report Reveals Revenue Declines Across Hardware but Record iPhone and Services Sales

  In the third quarter of 2023, Apple, the world’s largest listed company and technology giant, released its quarterly financial report. Total revenue fell year-on-year for four consecutive quarters, and its stock price fell nearly 3.39% after the market closed. The company has a market capitalization of approximately $2.8 trillion. Apple’s earnings report has an important impact on the market, as it accounts for about 7% of the S&P 500 index. At the same time, this financial report can also reflect clues about the overall economic health and consumer spending willingness.
  Despite the poor performance, this financial report was in line with market expectations. Among them, iPhone and service revenue both hit new highs. But with the exception of the iPhone, every hardware product saw year-over-year revenue declines. This led to a brief rise in the stock price as the earnings call began, but then fell. That’s because company executives predict that iPads and wearables will likely see significant declines in the coming quarters. The market is optimistic about Mac and iPhone revenue, but expects growth to be similar to the same period last year.
  We call Apple the “low-key king” because as the largest company in the US stock market by market capitalization, Apple’s stock price performance and products themselves have been somewhat lackluster this year, and it is even more “obscure” in the vigorous AI field. But the low-key Apple still has advantages and potential that no one can match. This company that Buffett calls “probably the best company” looks forward to continuing to maintain its kingly style. Apple’s stock price has risen “only” 36% this year. Although the increase is the lowest among the top seven leading stocks in the United States (Magnificent7), the weekly chart shows that its stock price is above the 100-week and 200-week moving averages, and the upward trend remains intact. If the price can confirm support along the flag-shaped consolidation pattern, the market outlook is expected to continue the upward trend.
Apple’s revenue has declined for the fourth consecutive quarter, and different sectors have become seriously divided.

  As of the end of September, Apple’s total revenue for the current quarter reached US$89.5 billion, slightly higher than market expectations of US$89.3 billion, although it fell 0.7% year-on-year. This is the first time since 2001 that there have been four consecutive quarters of year-over-year declines. However, earnings per share (EPS) of $1.46 beat estimates of $1.39 and was up 13% from $1.29 a year ago. Net profit was US$22.96 billion, exceeding market expectations of US$21.8 billion. Gross profit margin was 45.2%, higher than market expectations of 44.5% and 44.5% in the previous quarter.
  It should be pointed out that this is the first time since 2001 that Apple’s revenue has declined year-on-year for four consecutive quarters, but EPS has maintained double-digit growth and stopped falling in two quarters. One issue that has attracted attention is that Apple stated in its financial report that its total revenue in the coming quarter will be similar to the same period last year. However, Wall Street analysts believe that taking into account the three months that include the year-end shopping season, total revenue should return to year-on-year growth, with an expected growth rate of 5%, reaching $123.1 billion. This forecast is believed to be due to poor guidance provided by Apple.
  Specifically, iPhone revenue hit a record this quarter, and services revenue also reached a record high. However, the revenue of other hardware products fell year-on-year, with Mac computer revenue plummeting 34%, iPad tablet revenue falling 10.2%, and wearable devices, home and accessories revenue falling 3.4%.
  The iPhone is Apple’s “top product”. From the perspective of business segments, iPhone revenue of nearly US$40 billion in the previous quarter still contributed half of Apple’s total quarterly revenue, while revenue from the services segment increased by 8.2% year-on-year, exceeding US$20 billion and hitting a record high, accounting for 25% of total revenue. %, becoming Apple’s second largest source of revenue, ahead of wearable devices (10%), Macbook (8.5%) and iPad (7%).
  Mobile phone sales in the quarter reached US$43.81 billion, in line with market expectations, an increase of 10.4% quarter-on-quarter and a year-on-year increase of 2.8%; service revenue also performed well, reaching US$22.31 billion, higher than the expected US$21.37 billion, a year-on-year increase of 16.3% . This shows that the iPhone has boosted performance after the release of the new phone, causing quarterly revenue to increase by 10% quarter-on-quarter. Services revenue hit a record high for three consecutive quarters, showing Apple’s good performance in its diversified businesses.
  In addition, Mac computer and iPad tablet computer revenue performed poorly in the quarter, falling 33.8% and 10.2% respectively. This is also consistent with comments made by Apple’s CFO in its August earnings report that Mac and iPad sales will fall by double-digit percentages compared with the same period last year. Overall, the earnings report reflected areas of strength and weakness in Apple’s product line.
  From a regional perspective, only the American market experienced sales growth, with a growth rate of 0.8%. Revenue fell 2.5% in Greater China, 1.5% in Europe, 3.4% in Japan and 0.7% in other Asia-Pacific regions. This shows that Apple faces different challenges and opportunities in different regions.
  Overall, Apple excels in some areas, but also faces challenges from declining market share and fluctuating regional sales. However, the company is optimistic about demand in the Asian market. Apple CEO Cook said on the earnings call that iPhone revenue in mainland China hit a record high in the third quarter of this year, and the company’s overall revenue in India also hit a new high. He also praised the performance of the latest Mac computers released this week, saying “we now have the strongest product lineup heading into the year-end holiday shopping season,” with record-breaking revenue from every major service.
  In the future, as the year-end holiday shopping season, which is usually the largest and most important time for Apple’s revenue, approaches, investors are most concerned about three topics: whether new iPhone 15 sales and service revenue can hit new highs, and the competitive challenges of local brands in the Chinese market . Some people believe that more than 100 million iPhones in China are facing replacement and upgrade, which is still an opportunity for Apple. However, some analysts are worried about weak global demand and the trend of extended replacement cycles, which does not bode well for iPhone 15 sales in fiscal 2024. The availability of some parts for the higher-end and more expensive Pro and Pro Max models may also delay some sales from the December quarter to the second quarter of fiscal 2024, which ends in March next year. The key concern is that iPhone 15 sales will be “sluggish” due to a lack of new features, tight consumer spending and competition from Huawei. Market research company Counterpoint said last week that in the third quarter of 2023, Huawei’s market share in China increased by nearly 4 percentage points, while Apple lost 1 percentage point during the same period because “the initial sales of iPhone 15 were lower than the iPhone 14 series.”
The biggest challenge for Apple and AI in seeking to break through is its closed ecosystem

  For Apple, the most worrying and promising area is undoubtedly the field of AI. Investors will be watching to see whether Apple can close the gap with its competitors in the AI ​​arms race.
  Since Apple is essentially a company that mainly sells hardware, it has previously lacked a presence on the AI ​​​​track, and it has not formed a unified opinion on AI internally. The last time Apple launched a similar entry-level artificial intelligence product was Siri 12 years ago. But after seeing the popularity of language models such as ChatGPT and the strong impetus it brought to the stock prices of Microsoft, Google, Meta, etc., Apple also had to speed up the pace of catching up.

  Many people believe that Apple’s biggest challenge lies not in its disadvantage as a latecomer, but in its closed ecosystem. But perhaps it is precisely because of its closed nature that people do not really understand Apple’s AI layout. Cook once said that Apple has been deeply involved in fields such as artificial intelligence (AI) and machine learning (ML) for many years. In fact, many artificial intelligence functions are quietly entering the iPhone, but Apple has not deliberately mentioned the hot search term “artificial intelligence”.
  Different from competitors’ large language models based on supercomputers, what Apple wants to achieve may be to embed AI technology into every consumer terminal (incidentally solving the problem of data privacy), that is, product-oriented artificial intelligence . The latest M3 chip announced on October 30 makes this goal possible, and the world’s 2 billion active terminal devices and 1 billion paying subscribers are Apple’s biggest capital to achieve “overtaking in corners.”
  However, some people believe that although its products and services have a solid AI foundation, Apple’s AI-driven capital expenditures will have a negative impact, which may lead to a decline in free cash flow in fiscal 2024. People are increasingly concerned about Apple’s new generation growth engine service revenue. Concerns about antitrust regulatory risks, particularly the survival of its lucrative search engine exclusivity agreement with Google. Google CEO Pichai admitted this week that Google paid US$18 billion to become the default search engine on Apple devices in 2021, accounting for nearly 17% of Apple’s earnings per share that year. This year’s revenue may be US$19 billion.
“Soft and hard” service business is expected to become a new growth point

  Against the backdrop of a sluggish global smartphone market and fierce competition in the Chinese market, whether the iPhone 15 can drive a recovery in overall sales is the most concerning issue in the capital market. Wall Street analysts expect that sales of core hardware devices are expected to bottom out in the first quarter of fiscal 2024 (October-December), and the Indian market may be the biggest surprise.
  At the same time, the continuous expansion of the service business may be able to offset the sluggish demand for hardware equipment and is expected to become a new growth point for the company.
  Apple’s services segment mainly includes advertising, AppleCare, cloud services, digital content, payment services, etc. Its total revenue hit a record high in the second quarter, and its 25% revenue ratio translated into a gross profit margin of as high as 70.5%, which is much higher than hardware products (35.4%) and the company’s overall gross profit margin level (44.5%). In other words, $0.41 of every $1 of Apple’s gross profit comes from the services segment, and it wouldn’t be surprising if this ratio soon rose to 50%.
  Having said that, as a giant with a market capitalization of US$2.8 trillion, stable profitability is more realistic and important than pursuing rapid performance growth. As of the second quarter in June, Apple’s net profit margin was 24.68%, which was not only higher than the median of 21.64% over the past decade, but also significantly higher than the industry (technology-hardware equipment) average of 3.09%. During the epidemic and unfavorable conditions, It still maintained year-on-year growth despite the market environment. The gross profit margin of 44.5% during the same period was the highest level in the past 10 years.
  In addition, since about 60% of Apple’s revenue comes from overseas markets, once the United States enters an interest rate cut cycle (market expectations are the second quarter of 2024) and the appreciation of the U.S. dollar ends, it will have a positive impact on overall performance.

Up “only” 36% for the year but share price upward trend remains intact

  For shareholders, Apple’s return on equity (ROE) reached 130%, well above the 47.8% median and the industry median of 5.5% over the past decade. The trailing 12-month dividend per share was $0.93, with average dividends growing 6.3% over the past three years, 8.2% over the past five years, and 16.6% over the past 10 years.
  The second quarter financial report shows that Apple holds US$62.5 billion in cash, cash equivalents and short-term securities. Regardless of performance, Apple has maintained very stable levels of dividends and repurchases. According to FactSet statistics, between 2012 and 2022, the company’s cumulative amount spent on repurchases exceeded US$570 billion, the highest amount in the US stock market.
  According to Tipranks data, a total of 22 analysts have given Apple a “buy” rating, 9 analysts have given a “hold” rating, and no one has given a “sell” rating. Analysts’ average target price is $203.35, with the highest forecast price being $240, which means there is nearly 20% room for upside from the current stock price of $170.
  Apple’s stock price has risen “only” 36% this year. Although the increase is the lowest among the top seven leading stocks in the United States, the weekly chart shows that the stock price is above the 100-week and 200-week moving averages, and the upward trend remains intact. It is worth noting that large technology stocks, including Apple, have gained a risk-averse halo after the epidemic, which may be able to smooth out stock price fluctuations caused by the switch in the economic cycle.
  Apple’s performance is also crucial for the S&P 500, which has climbed back above its 200-day moving average at the time of writing. If it could close above this, it would be the first significant bull signal. Bulls will then need to retake more of the breakout levels for further confirmation. The current key resistance range is 4302-4335. Bears must hold their ground here if they want to maintain control. As for support, the first thing to watch is the 200-day moving average at 4255, followed by Wednesday’s high of 4245. If it falls below 4245 points, it will be the result of a bear market. (The author is a senior analyst at Jiaqiang Group. The article only represents the author’s personal views and does not represent the position of this publication. The stocks involved in this article are only examples and do not make trading recommendations.)
Overseas focus of the week
Fed keeps interest rates unchanged, U.S. bond yields fall below 5%

  On Wednesday local time, the Federal Reserve announced its latest interest rate decision, announcing that it would keep the benchmark interest rate unchanged in the 5.25-5.50% range. This is the second consecutive meeting of the Federal Reserve to suspend raising interest rates after September, indicating its wait-and-see stance in the fight against inflation. In the statement, officials stressed that tight financial and credit conditions will put pressure on the economy and reiterated that they would assess the extent of further policy tightening.
  Following the news, the benchmark 10-year Treasury note yield fell about 10 basis points to 4.639% on Thursday. The two-year U.S. Treasury yield fell more than 3 basis points to 4.95%.
WeWork will declare bankruptcy SoftBank will suffer huge losses

  On November 1, it was reported that WeWork, the originator of global co-working offices, plans to file for bankruptcy protection in New Jersey, USA, as early as next week.
  WeWork previously failed to pay interest to its bondholders on October 2 and was then given a 30-day grace period. If the interest is still not paid within the grace period, it will be considered a default. We‐Work said on Tuesday it had reached an agreement with bondholders that gives the company seven more days to negotiate with stakeholders before triggering a default.
  As of June this year, WeWork had 777 offices in 39 countries, including 229 in the United States, according to securities filings.
  Disclosure data shows that from 2016 to 2022, WeWork suffered a cumulative loss of US$14.96 billion. Among them, SoftBank first invested billions of dollars in WeWork through its Vision Fund in 2017. When WeWork went public, SoftBank became its largest shareholder, with a shareholding ratio of approximately 29%.
  Wind data shows that WeWork’s stock price has fallen 98% so far in 2023.
Microsoft Office AI debuts, starting a new growth cycle for Microsoft

  On Wednesday local time, Microsoft began selling the Microsoft365 Copilot artificial intelligence plug-in for its enterprise-oriented Office application subscriptions. The service will add generative AI capabilities to applications such as Word, Excel, and PowerPoint. Each user will pay $30 per month, billed annually.
  According to Microsoft, the languages ​​currently supported by Copilot are English, Spanish, Japanese, French, German, Portuguese, Italian and Simplified Chinese.
  As Microsoft 365 Copilot begins ordering, market analysts believe that Microsoft may begin to enter the next growth cycle.
Demand for weight loss pills surged, with single product sales soaring 734% in the third quarter

  This week, Novo Nordisk announced its latest financial report, which shocked the capital market. Sales of Novo Nordisk’s weight-loss drug Wegovy surged 734% to $1.37 billion, while sales of diabetes treatment Ozenpic climbed 56% to $3.4 billion.
  Eli Lilly and Company’s blockbuster diabetes drug Mounjaro, also considered an unlabeled weight loss drug, is expected to receive approval from the U.S. Food and Drug Administration before the end of the year. Whether Eli Lilly and Company can provide enough Mounjaro to meet market demand has become a concern in the capital market.

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