Apple (AAPL 1.30%) published its earnings results for its second fiscal quarter, which ended April 4, and its sales and earnings results that came in ahead of the market's expectations. The business recorded earnings per share of $1.52 on revenue of $94.94 billion, while the average analyst estimate had called for per-share earnings of $1.43 on sales of approximately $92.9 billion.

Apple delivered solid top- and bottom-line beats in the quarter, but revenue was actually down 2.5% compared to the prior-year period, and earnings per share were flat despite positive impacts from share buybacks and tax advantages. What comes next for the world's largest company and its stock? Read on for one green flag and one red flag to consider following the tech titan's recent earnings results. 

A lineup of iPhone 14s in different colors.

Image source: Apple.

Green flag: iPhone continues to power incredible profits

iPhone revenue grew by roughly 1.5% year over year to reach $51.3 billion in the second quarter, setting a new record and bucking a 7% year-over-year global revenue decline for the overall smartphone category. While the iPhone did see unit sales decline in Q2, the product family still managed to grow revenue thanks to increases in average selling price.

According to analysis from Counterpoint, Apple recorded the smallest unit-sales decline of all major phone manufacturers in the quarter, and it increased its global unit share in the market to a best-ever 21%. In terms of profits, the picture is almost certainly even better. Last year, Apple captured roughly 85% of global operating profit on smartphone sales, and it looks like the iPhone will continue dominating the category. 

Thanks to incredible profits spurred by the iPhone and other products and services, Apple will continue to support a policy of returning value to shareholders. The company announced it was raising its quarterly dividend 4% to $0.24 per share, and it has now delivered an annual payout increase for 11 years straight. Apple's board of directors also authorized an additional $90 billion in stock buybacks, which should be a positive catalyst for earnings per share as stock will be retired after being repurchased.

Red flag: Macroeconomic headwinds threaten valuation

Apple is facing a tougher economic environment, and sales for Mac computers, iPads, wearables, and home accessories all fell significantly in Q2.

Mac revenue was down 31.3% year over year, and iPad sales fell 12.7%. Meanwhile, sales for the combined wearables, home, and accessories segment were down 0.7%. On the other hand, the company did get some help from its services segment, which saw sales increase 5.4% year over year to reach $20.9 billion.

There are already some signs that tougher economic conditions are making customers more cautious, and these headwinds could get worse before they get better. With many economists and analysts expecting the U.S. to dip into recession later this year, there's a real risk that tougher conditions will have a significant negative impact on Apple's business. Shoppers may opt to hold off on new hardware purchases or upgrades, but the company's current valuation seems to be priced around the business remaining quite sturdy. 

AAPL PE Ratio (Forward) Chart

AAPL PE Ratio (Forward) data by YCharts

Despite reporting two consecutive quarters of year-over-year sales declines this year, Apple stock has been surging in 2023. Its share price is up roughly 28% year to date as of this writing, and the company is valued at approximately 28 times this year's expected earnings.

While earnings per share were flat year over year in Q2 thanks to buybacks and tax changes, net income actually declined 3.4% to come in at $24.16 billion. There's no doubt that Apple is a great company, but sales and profits have slipped lately, and near-term macroeconomic conditions could be challenging.

What comes next for Apple?

Apple's price-to-earnings ratio should be viewed in the context of the fact that it's already a massive, category-leading company that dependably serves up incredible profits. While macroeconomic pressures could continue to tamp down on sales and earnings in the short term, the business should remain enormously profitable thanks to the iPhone and other hardware and service offerings. The company is clearly valued at a premium, but for long-term investors, Apple's dominant market position and nearly unparalleled profit generation means that premium may be justified.