Apple's (AAPL -0.60%) stock rallied 5% on May 5 after the tech giant posted its latest earnings report. For the second quarter of fiscal 2023, which ended on April 1, its revenue dipped 2.5% year over year to $94.8 billion but still surpassed analysts' estimates by approximately $2 billion. Its earnings stayed flat at $1.52 per share, but that also cleared the consensus forecast by $0.09 per share.
At first glance, Apple's growth rates seem anemic -- especially for a stock that has already rallied 34% this year versus the S&P 500's 8% gain. But if we dig deeper, we can find plenty of reasons to be both bearish and bullish on its future.
Image source: Apple.
What the bears will tell you about Apple
The bears will point out that Apple is still overwhelmingly dependent on the iPhone, which accounted for 54% of its revenue in the second quarter. Its iPhone sales rose 1.5% year over year, but it will likely face diminishing returns as the aging smartphone market becomes increasingly saturated.
The smartphone market is also still stuck in a cyclical decline after the big 5G upgrade cycle of 2020 and 2021. According to IDC, global smartphone shipments tumbled 11.3% to 1.21 billion units in 2022 -- marking the industry's lowest number of annual shipments since 2013 -- and could slump another 1.1% in 2023 as iPhone and Android shipments decline 0.5% and 1.2%, respectively. In other words, Apple's iPhone sales could still stall out in the second half of fiscal 2023.
Apple's Mac and iPad sales, which together accounted for 15% of its top line in Q2, also declined against difficult comparisons to their launches of M1-powered devices a year earlier, as well as macro and currency headwinds. Those pressures could persist throughout the rest of the year as consumers buy fewer Macs and iPads for remote work and online learning in a post-pandemic market.
Apple's services revenue, which comes from its App Store and subscription-based services, rose 5% year over year in the second quarter and accounted for 22% of its top line. But that also was a slight slowdown from its 6% year-over-year growth in Q4. That deceleration could be a red flag because Apple expects the growth of its services segment to lock in its users and gradually reduce its overall dependence on the iPhone.
Finally, its growth rates might not support its valuation. Analysts expect Apple's revenue and earnings to decline 2% and 3%, respectively, this year as its soft hardware sales offset its rising services revenue. Yet it still trades at 28 times forward earnings -- presumably because it's considered a "safe haven" stock. Microsoft, which is still growing at a faster clip than Apple, trades at just 25 times forward earnings and doesn't rely on a single product line for half its revenue.
What the bulls will tell you about Apple
The bulls will acknowledge that Apple faces a near-term slowdown and relies too much on the iPhone, but they'll also point out its iPhone sales actually just set a new fiscal Q2 record, which suggests the market's appetite for new iPhones won't wane anytime soon. Furthermore, a recent survey by AddictiveTips found that 94% of iPhone users planned to stick with Apple, compared to just 80% of Android users who planned to stick with their current brand.
That brand loyalty, along with the sticky nature of Apple's ecosystem, should lock more users into its subscription-based services. That's why it reached a whopping 975 million paid subscriptions across all of its services in the second quarter, which equaled 18% growth from its 825 million subscribers in the prior-year period.
That massive audience of paid users puts Apple in a prime position to challenge Netflix in the streaming video race with Apple TV+, Spotify in streaming music with Apple Music, and a wide range of video game publishers with Apple Arcade. It's been bundling together all those services -- along with Apple News+, Apple Fitness+, and iCloud+ -- in its Apple One subscription bundles.
As for the company's sluggish hardware sales, the bulls will emphasize that its iPhone, Mac, and iPad sales have bounced back from plenty of cyclical downturns before. They also believe Apple will likely launch new devices -- including its long-rumored mixed-reality headsets -- to diversify that portfolio in the near future.
Last but not least, Apple ended its second quarter with $166 billion in cash and marketable securities, and it bought back nearly 40% of its outstanding shares over the past 10 years. It also just authorized another $90 billion buyback plan, which indicates it aims to return most of its cash to its investors instead of making reckless acquisitions.
Stick with the bulls
Apple has repeatedly proven the bears wrong over the past decade. Its stock isn't cheap and its forward dividend yield of 0.6% seems paltry, but this tech juggernaut still has plenty of room to expand its business. Investors should focus on those long-term strengths -- along with its massive pile of cash -- and stay bullish on this evergreen tech stock.
