The largest company in the world by market capitalization, Apple (AAPL +2.62%), reported a troubling metric during its latest earnings report: declining revenue. What makes this so significant is that it hasn't reported a quarter where this happened since 2019, making investors ask the obvious question: Is it time to sell Apple stock?
While that might be the first reaction, there are other factors to consider rather than just one data point. Let's see if the stock is worth holding on to now.
A disappointing quarter for iPhones
Since the start of 2023, Apple's stock has been on a tear, up nearly 19%. That only leaves it down 13% since the start of 2022, something few other stocks can claim.
However, after it delivered its report for the first quarter of 2023 (ended Dec. 31), I wouldn't be surprised if this rapid stock rise runs out of steam.
As mentioned above, its revenue declined by 5%, the first drop since 2019, but let's examine which categories caused the slowdown.
| Category | First-Quarter Sales | YOY Change |
|---|---|---|
| iPhone | $65.8 billion | (8.1%) |
| Mac | $7.7 billion | (28.7%) |
| iPad | $9.4 billion | 29.7% |
| Wearables, home, and accessories | $13.5 billion | (8.3%) |
| Services | $20.8 billion | 6.7% |
Source: Apple. YOY = Year over Year.
The real strength in the quarter was its iPad segment, which launched its 10th generation and the new M2 iPad Pro in October 2022, so the first quarter benefited from these new products.
Apple's services division also showed growth with all-time-high revenue. Management indicated this growth came from its App Store subscriptions and from revenue records in its cloud and payment services.
That's enough of the good; let's get to the bad.
Unsurprisingly, the Mac had a tough quarter. No matter where you look, expensive consumer electronics aren't selling well. This sentiment echoed in the wearables, home, and accessories division, although little was discussed about Apple TV+ (which is included in this segment) for the first quarter.
NASDAQ: AAPL
Key Data Points
None of the other four divisions together can match what the iPhone generates, which makes the revenue drop concerning. But those fears are diminished when you dig into what happened during the first quarter.
First, Apple had to deal with some fierce currency headwinds, and when you adjust for that, the revenue was actually flat year over year. Second, Apple faced shortages of its new iPhone 14 Pro and 14 Pro Max in November and December, peak holiday buying season.
This revenue decline, coupled with operating expenses rising 12%, affected profit margins, which dropped from 28% in 2021 to 26% this year. Although that's not a significant change, it was enough for Apple to miss earnings-per-share projections by about 11%.
So is this a signal that 2023 won't be a great year for the stock?
Apple's multiple expansion is likely complete
Apple currently trades for about 26 times earnings, which isn't a cheap valuation, let alone for a company whose revenue is slowing. Furthermore, Wall Street analysts project it will increase revenue by only 1.8% in fiscal 2023 and 5.7% in fiscal 2024, which doesn't leave much room for growth.
Much of Apple's stock growth has come from multiple expansion rather than revenue growth over the past decade.
AAPL PE ratio data by YCharts. TTM = trailing 12 months.
While it's true that Apple was undervalued 10 years ago, it is no longer the case. Multiple expansion happens when investors are willing to pay more for a stock from a valuation basis than they previously did. This usually occurs during a business transition or a sentiment change. As the iPhone became the go-to device for many Americans, this multiple expansion was warranted.
The problem with multiple expansion is that it has its limits, and once that ceiling is reached, the stock returns to growth based on revenue and earnings. With Apple's expensive valuation and slowing growth, I think it doesn't have nearly the upside it used to, and investors should think about looking for other growth stocks to take its place.
However, if you're looking for a slow and (mostly) steady grower, Apple can still fill that space in your portfolio.
