Share prices of Apple (AAPL -2.41%) have tumbled 9% since Aug. 1 as a reaction to disappointing earnings results for the third quarter. The company did beat analyst estimates for earnings per share and revenue but both figures were flat year over year. Year-over-year declines across its product segments concerned investors and led to a stock dip.
The iPhone manufacturer faces uncertain market conditions that are affecting many companies and causing reductions in consumer spending. But these challenges aren't likely to be long-term, which suggests a potential investment opportunity. The company's shares rarely stay down for long, so it might be worth buying the dip.
Before going all in on a buy though, it might be helpful to look at the positives and potential negatives of the business. Here's one green flag and one red flag for Apple in 2023.
Green flag: Apple has a booming services business
Despite trouble in its product sales, Apple's services segment is proving to be resilient despite the uncertain economy. This segment includes its applications platform as well as services such as Apple TV+, Music, Arcade, Fitness+, and News+. Its growth has led it to now be the second-highest earning segment in the company after the iPhone.
In the fiscal 2023 third quarter (ended July 1), services enjoyed the most growth of any segment, with revenue rising 8% year over year and hitting $21 billion. Its stellar performance was not unusual, as services reported revenue growth of 14% in fiscal 2022, double the growth of the iPhone.
The subscription aspect of services tends to be particularly lucrative as Apple can pay once to produce a form of content and sell it millions of times over to consumers worldwide. As a result, the services segment's profit margins regularly hit about 70% while its product profit margins hover around 35%.
As Apple navigates an economic downturn, services will be crucial to profitability.
Red flag: Declines across Apple's product lineup
Apple's latest quarter triggered concern from investors for the company's products business. Its highest-earning segment, the iPhone, reported a 2% year-over-year revenue decline, with a 7% dip in Mac sales and a 20% tumble in iPad revenue. The only product category to see year-over-year growth was wearables, with a 2% rise in revenue for the quarter.
Challenges in its product segment led Apple to report its third consecutive quarterly revenue decline, slipping 1% year over year to $82 billion.
While the company did see reduced product sales, it continues to outperform the competition (which is seeing the same macroeconomic strain). According to Counterpoint Research, marketwide smartphone shipments fell 24% year over year in the second quarter. Samsung's smartphone sales in the U.S. plunged 37% year over year, with its market share decreasing from 27% to 23%. Meanwhile, iPhone sales dip a more moderate 6% year over year while gaining market share, rising from 52% to 55%.
Apple's answer to these issues
Apple management is aware of these issues and investors' concerns and is working to address them. For instance, Apple is making a major push into artificial intelligence (AI), which could attract more shoppers to its products over the long term. This year, the company unveiled several AI-enabled features to devices such as the iPhone and its AirPods Pro.
CEO Tim Cook said in the third-quarter earnings call that a large portion of its $23 billion in research and development spending for the quarter went to generative AI initiatives. With leading market shares in many of its product categories, Apple could play a major role in the widespread adoption of AI services over the next decade.
What should investors do with this Apple news?
There's still reason to invest in Apple's stock. The company did have a financially poor 2023, with repeated declines in revenue. But its performance compared to the competition indicates it won't be down forever and continues to be one of the best investments in tech. Its stock price is up 240% in the last five years, significantly more than other FAANG stocks like Meta Platforms, Microsoft, Alphabet, and Amazon. Despite recent declines, Apple still has real potential to keep the growth going and continue to be an attractive long-term buy.
