The Nasdaq Composite index got off to a hot start to begin 2023. Before several technology companies reported earnings, investors were buying up shares as they sensed weakness in the market. Subsequently, many big tech companies echoed similar sentiment during earnings calls throughout February. Namely, while top-line revenue is still growing, the pace of this growth is slowing down.
Executives sense waning demand from both consumers and corporations as budgets are tightening and inflation lingers. Unsurprisingly, several companies issued underwhelming guidance, which led to large sell-offs. Sometimes when investors follow one another, particularly during times of fear or panic, stocks can become oversold and therefore undervalued.
One of the most respected technology research analysts on Wall Street is Wedbush Securities' Dan Ives. Late last week, he issued a report stating that Apple (AAPL 0.64%) stock could be a good buy at its current valuation. Let's dig into Apple's financials and analyze whether Ives' claims are justified.
Apple's financial condition is strong
For its fiscal 2023 first quarter ended Dec. 31, Apple reported total revenue of $117.2 billion, which was roughly a decline of 5% year over year. At first glance, seeing a company's revenue decline can be concerning. When it's Apple, arguably the strongest company of all time, it's both confusing and uneasy. However, it should be noted that Apple actually grew revenue year over year on a constant currency basis.
The breakdown of Apple's quarterly revenue was $96.4 billion in products and $20.8 billion in services. The entirety of Apple's revenue decline was attributed to products, which was $104.4 billion in December 2021. CFO Luca Maestri explained that product revenues were impacted by the current macroeconomic picture, as well as supply chain shortages for the company's new iPhone.
Maestri's explanation makes a lot of sense. Consumers are concerned about inflation and the possibility of a recession. For this reason, it's not surprising to see the consumer spending environment react more conservatively than it did in prior periods. Moreover, a significant portion of Apple's manufacturing operations resides in China. While the COVID-19 pandemic is certainly below its peak, China has had some restriction protocols in effect during recent months.
While product revenue declined year over year, Apple's services revenue not only increased but set an all-time record. Furthermore, CEO Tim Cook boasted that Apple's installed base crossed 2 billion total devices. To put this into perspective, Apple had 1 billion active devices less than a decade ago. Given the rapid rise in its installed base, it's not surprising to see Apple's services revenue grow in tandem.
Despite the fluctuations in revenue and foreign exchange rates, Maestri thoroughly explained how strong the company's balance sheet is when he stated:
We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion.
As an investor, it's important to zoom out and not obsess over the granularity of one quarter. Carrying $165 billion in cash and marketable securities is astounding. Apple's liquidity is unquestionably strong. The company has the resources it needs to invest strategically and generously reward its shareholders.
Image source: Getty Images.
As far as the Ives can see
Ives raised his price target on Apple stock to $190 per share, which would imply roughly 27% upside to its current price at the time of this writing. Additionally, the analyst has a buy equivalent rating on the stock.
His primary thesis revolves around demand for the iPhone in China. While November and December faced supply chain challenges, Ives' research suggests that the first three months of 2023 are showing a bounce in demand. Although investors are not privy to precise demand figures, Ives' research makes sense. Given that China has lifted its zero-COVID policy from a few months ago, a natural assumption would be that consumer spending is rising given more public foot traffic.
As Cook explained during the earnings call, the real driver of increased services revenue was the number of active devices in Apple's installed base. Assuming that the company is experiencing a positive turnaround in product demand in China, another appropriate assumption to make is that this will serve as a tailwind for services revenue.
The combination of increased demand in hardware products and the subsequent services purchases that are made provide Apple with an encouraging path forward.
Good enough for Buffett, good enough for you?
Warren Buffett is one of the most celebrated investors of all time. He is widely known to invest in businesses that generate strong cash flow. For example, he is a big fan of insurance companies. For this reason, Buffett was known to turn away from volatile technology stocks for quite some time.
In recent history, though, the famous investor realized that not all tech companies are created equal. While many of them reinvest any excess cash into initiatives that may or may not pay off in the future, Apple consistently uses its profits to pay dividends, buy back shares, and hold cash on the balance sheet.
Over the last several years, Buffett has taking a liking to Apple stock and is now the company's third-largest institutional investor. According to publicly available data, Buffett's investment vehicle, Berkshire Hathaway, purchased more than 300,000 additional shares in Apple stock during the last few months of calendar 2022. His average price was $142 per share. Despite Apple's lackluster earnings in February, Buffett is already up on his purchase. Furthermore, should Ives' prediction prove correct, Buffett could be looking at a return of over 30% in just a 12-month timeframe.
It should be noted that Buffett is an investor with a long-term horizon. Even if he does assume a 30% return by the end of the year, it is unlikely that he will sell a significant portion of his holdings. However, the more important picture here is that if Apple surprises investors and shows resiliency across its product portfolio and geographic regions, the stock will likely push higher beyond 2023.
As Apple currently trades at $150 per share, now looks like a great opportunity for long-term investors to buy in parallel with Buffett and lower their cost-basis.
