Apple (AAPL 1.27%) posted its latest earnings report on Feb. 2. For the first quarter of fiscal 2023, which ended on Dec. 31, the tech giant's revenue fell 5% year over year to $117.15 billion and missed analysts' estimates by $4.5 billion. Its diluted earnings dropped 10% to $1.88 per share, which also missed the consensus forecast by $0.07.
That represented Apple's steepest revenue decline since 2016, but its stock still advanced on Feb. 3 as investors shrugged off the bad news. Let's review the seven red flags that appeared across Apple's earnings report -- and if those challenges will tarnish its reputation as a top blue chip tech stock for long-term investors.
Image source: Apple.
1. Weak iPhone sales
Apple's iPhone sales fell 8% year over year in the first quarter and accounted for 56% of its revenue. That decline wasn't surprising -- since it had been grappling with slower 5G upgrades, inflationary headwinds, COVID-19 disruptions in China, and the protests at Foxconn's iPhone factory in Zhengzhou last November -- but it was still disappointing to see Apple's core growth engine grind to a halt. Apple's issues in China mainly affected its sales of the top-tier iPhone 14 Pro and 14 Pro Max.
2. Weak Mac sales
Apple's Mac sales, which accounted for 7% of its top line, also fell 29% year over year as it struggled with macroeconomic challenges, unfavorable currency headwinds, and tough comparisons to its launch of its redesigned M1 MacBook Pros a year earlier. That pressure could persist as long as the broader PC market remains weak in a post-pandemic world.
3. Soft sales of wearables and home products
Apple's Wearables, Home, and Accessories revenue, which accounted for 12% of its top line, dipped 8% in the first quarter. Once again, it blamed that decline on macroeconomic and currency headwinds.
But during the conference call, Apple CFO Luca Maestri claimed the segment's installed base "set a new all-time record" as it gained the "largest number of customers new to a smartwatch that we ever had in a given quarter."
Its robust sales of new Apple Watches might have been offset by its softer sales of AirPods, HomePods, Apple TVs, or other devices, but Apple didn't provide any useful growth metrics regarding those lesser product lines.
4. Increased macroeconomic concerns
The bulls often claim Apple is a recession-resistant stock because it has plenty of pricing power and targets more affluent customers. But during the conference call, Maestri challenged that thesis by admitting the macroeconomic environment had become "markedly more challenging than 12 months ago."
5. A lack of guidance for the second quarter
Apple might have allayed some of those concerns by providing an outlook for the second quarter, but it hasn't provided any forward guidance for the past three years. Apple initially suspended that practice due to the pandemic, but it probably won't start providing quarter-by-quarter guidance again until the macro situation improves.
6. A key executive departure
Back in 2019, Apple's chief designer Jony Ive -- who had been responsible for the Mac, iPod, iPhone, and iPad under Steve Jobs -- left the company. Evans Hankey succeeded Ive as its new design chief, but Apple also signed a new agreement with Ive's own design firm LoveFrom to oversee the development of its new products. However, Apple's deal with LoveFrom expired last year and wasn't renewed.
That's why investors were surprised when Hankey, who had been considered a potential successor to Tim Cook, also announced his upcoming departure. Instead of hiring a new design chief, Apple plans to rely on a team of about 20 industrial designers who will report to its chief operating officer Jeff Williams. That shift raises troubling questions regarding the future designs of its hardware products -- and if they'll lose their appeal when pitted against slimmer and sleeker devices.
7. Its valuation
For now, analysts expect Apple's revenue and earnings to rise just 2% and 1%, respectively, this year, as it faces tough cyclical and macro headwinds. In fiscal 2024, they expect its revenue and earnings to grow 6% and 9%, respectively, as those headwinds weaken. That outlook isn't surprising. But at 25 times this year's earnings, Apple's stock looks a bit expensive relative to its growth rates. Its anemic forward yield of 0.6% also won't impress any serious income investors.
Don't overlook its strengths
Yet it wasn't all bad news for Apple's investors. On a constant-currency basis, Apple's revenue still rose year over year in the first quarter -- so its reported growth should accelerate once the dollar weakens.
Apple's iPad and services revenue also increased in the first quarter. It ended the quarter with 935 million paid subscribers across all of its services -- representing 19% growth from a year ago -- which gives it a firm foundation to launch additional hardware and software products. It was also sitting on $165 billion in cash and marketable securities, which gives it plenty of room for more dividend hikes, buybacks, investments, and acquisitions.
Most of Apple's aforementioned red flags are cyclical instead of existential. Its elevated valuation and Hankey's departure are a bit troubling, but Apple should remain one of the safest blue-chip tech stocks to buy and hold for the foreseeable future.
