Share prices of Apple (AAPL +1.09%) slipped nearly 5% after the company released fiscal 2023 third-quarter results (for the three months ended July 1) on Aug. 3. Apparently, investors pressed the panic button following yet another quarter of declining iPhone sales and tepid guidance.
Revenue fell 1% versus the year-ago period to $81.8 billion. Earnings were down 5% year over year to $1.26 per share. The tech giant's revenue was in line with Wall Street's expectations, and its earnings were comfortably ahead of the $1.20 consensus estimate.
Apple's outlook for the current quarter was the main culprit as management said it expects revenue to decline on a year-over-year basis again in Q4 due to macroeconomic headwinds. This would mark the fourth straight quarter of declining sales for Apple, driven by weakness in smartphones, tablets, and computers across the globe.
NASDAQ: AAPL
Key Data Points
Not surprisingly, shareholders sold Apple stock following its latest report. But savvy investors might want to take advantage of this decline for one simple reason.
Why the worst might be behind the iPhone
The iPhone was Apple's biggest source of revenue last quarter, accounting for 48% of its overall sales. The company witnessed a 2.5% year-over-year decline in iPhone revenue during the quarter to $39.7 billion, and this weighed on its overall performance. But a closer look suggests that the iPhone lineup is selling well even in difficult times.
According to market research firm IDC, global smartphone shipments were down 7.8% year over year in the second quarter of 2023. But iPhone shipments fell only 6.3% year over year to 42.5 million units from 45.4 million units in the year-ago period. As a result, the phone's share of the global smartphone market increased to 16% last quarter from 15.8% in the same quarter a year ago.
And iPhone revenue in the previous quarter fell at a slower pace than the decline in the company's unit shipments, which can be attributed to Apple's robust pricing power. Using IDC's iPhone shipment estimate and Apple's revenue from sales of the device, the average selling price (ASP) of each iPhone came in at $933 last quarter. This was a 4% increase over the prior-year period's figure of $895.
So, Apple was able to command more money per unit even during difficult times for the smartphone market. This should set the stage for a rebound in the device's revenue in the second half of 2023 for a couple of reasons.
First, the smartphone market is expected to return to growth by the end of the year, according to IDC. And smartphone sales are expected to rise in 2024 following this year's anticipated decline of 3.2%, which won't be surprising given the cooling of inflation, the receding probability of a recession in the U.S., a solid pick-up in economic growth, and a resilient jobs market. With all that has been weighing on the smartphone market likely to go away, that could be a tailwind for Apple.
The second reason iPhone sales could start picking up from the second half of 2023 is because of a big base of users currently in an upgrade window. Dan Ives of Wedbush Securities estimates that there are 250 million iPhones that haven't been upgraded in more than four years. This presents a solid opportunity to bump up volumes at a double-digit rate in the coming year given that the company has sold 222 million smartphones in the past four quarters.
Even better, Ives expects Apple's smartphone ASP to rise further with the arrival of its next generation of smartphones next month. Again, that won't be surprising given the healthy demand for the higher-priced Pro and Pro Max models.
A potential double-digit increase in iPhone shipments (based on Ives' estimate of 250 million iPhones that are in an upgrade window) and an increase in ASPs could help Apple come out of the rut it is in right now.
Better times await the tech giant
Apple is in the final quarter of its fiscal 2023. The company's revenue has dropped 3.3% in the first nine months of the fiscal year to $293.8 billion, and analysts expect it to finish the year with $385 billion in revenue. That would be a 2.3% decline from fiscal 2022.
But revenue is expected to pick up in the new fiscal year, which will begin in October, increasing to $411 billion. Its top line is expected to increase to $435 billion in fiscal 2025.
We have already discussed why Apple is likely to hit these targets. That's why savvy investors can consider using the drop to buy more shares, especially considering that the company has more catalysts in the bag that could help it grow faster in the coming year and beyond.
