This year has started in stark contrast to its predecessor. After enduring its worst performance in over a decade, the stock market has bounced back. The major market indexes have each gained 20% or more from their respective bottoms, and by that measure suggest the start of the next bull market.
Yet while Wall Street has notched impressive gains so far this year, signaling that the recovery has begun, some segments of the consumer-facing economy still struggle. Such is the case with Apple (AAPL -0.35%).
When the iPhone maker reported the results of its fiscal third quarter, ended July 1, revenue declined 1% year over year, marking the third successive quarter of falling sales. While that might not seem like a reason to celebrate, several underlying metrics suggest Apple is setting the stage for a robust recovery to come.
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A mixed bag
Apple product sales continued to struggle. The iPad fared the worst, down 20% year over year, while Mac sales slipped 7%. Apple's flagship iPhone held up the best, down just 2% year over year. There's no sugar-coating it: Since sales of the iPhone represent roughly half of Apple's total revenue, the device has the most significant impact on its results. As go sales of the iPhone, so goes Apple.
The news wasn't all bad, and there were actually shoots of growth, which Apple's management was happy to focus on. The wearables, home, and accessories segment, led by the Apple Watch and AirPods, returned to growth, up 2% year over year.
The crown jewel
The headliner was Apple's services segment, which continued to do the bulk of the heavy lifting. Services grew 8% year over year, hitting a new all-time high for the third successive quarter.
Perhaps the most important revelation was that Apple had amassed more than 1 billion paid subscriptions, helping fuel the performance of the services segment. This includes subscriptions to such services as Apple TV+, Apple Music, and iCloud+, as well as Arcade, Fitness+, and News+. Apple has more than 1 billion active iPhones in the wild, meaning there are nearly as many subscribers as iPhone users. Furthermore, the company boasts more than 2 billion active devices in all, which will help expand its growing ecosystem of products and services.
It's (still) the economy
The persistent sting of high inflation continues to dominate the economic landscape and has consumers reining in spending on all but the essentials.
Personal consumption expenditures (PCE), the Federal Reserve Bank's favored measure of inflation, rose 4.1% compared with a year ago. While that's an improvement from recent months, there's still work to be done. The benchmark notched its lowest level since September 2021 but is still historically high.
So while inflation is easing, consumers are still feeling the pinch and will probably put off upgrading to the next iPhone just a bit longer. However, once the economy rebounds, as it inevitably will, the pent-up demand for iPhones is likely to drive the stock higher. Wedbush analyst Dan Ives estimates that 25% of the iPhone's installed base -- or roughly 250 million devices -- haven't been upgraded over the past four years, setting Apple up for a "mini super cycle" as the economic outlook improves.
The bigger financial picture
While inflation has been the biggest drag on Apple's results, the strong dollar continues to skew the company's financial results, as sales made in foreign currencies translate into fewer dollars. This, in turn, makes the financial statement results appear worse than they really are. In the third quarter, Apple's revenue was 4% lower than it would have been, because of foreign exchange headwinds.
Yet despite those obstacles, Apple's profits were surprisingly robust. Net income increased 2% year over year, while earnings per share climbed nearly 6%. It's also worth noting that Apple continues to generate an enviable amount of cash, with operating cash flow of $89 billion during the first nine months of its fiscal 2023.
Finally, Apple has a strong track record of shareholder-friendly policies. Since the company reinstituted its dividend in 2012, Apple has increased its payout by 154%. While its 0.50% yield might seem paltry, that's a function of the stock's magnificent performance, with gains of more than 1,000% over the past 10 years. The company also bought back more than 103 million shares, worth $18 billion. That means existing shareholders are entitled to a larger percentage of Apple's profit.
Data by YCharts
Hold forever
While some investors might balk at the idea of "holding forever," the way things stand right now, Apple stock is as close as it gets to a sure thing. With more than 1 billion active iPhones, users will continue to shell out money for apps, subscriptions, and other services, fueling the company's flywheel of growth.
Apple has proved time and again the value of its large and growing laundry list of products and services, with the iPhone acting as the hub in that wheel.
It isn't the screaming bargain it was just months ago, but Apple stock is currently selling for 30 times earnings, a slight premium to the price-to-earnings (P/E) ratio of about 26 for the S&P 500 (^GSPC 1.02%). However, given the stock's years of consistent performance, a powerful roster of recurring revenue, and the historically high pent-up demand for its flagship iPhone, the evidence is clear that Apple is one stock you can buy now and hold forever.
