Shares of Apple (AAPL 0.85%) have pulled back significantly since the company's earnings report earlier this month. As of this writing, the stock has fallen a total of about 7% since the quarterly update on Aug. 3.
This decline comes even though Apple returned to earnings growth during the quarter. Is this pullback a red flag or a buying opportunity?
Here's a look at why Apple's earnings report may be better than it appears on the surface, and why the decline in the company's stock price may, indeed, represent a good buying opportunity.
NASDAQ: AAPL
Key Data Points
Don't overlook this key metric
On the surface, Apple's fiscal third-quarter earnings report was solid. Revenue fell year over year to $81.8 billion. But the 1% year-over-year decline was smaller than the decline the company saw in the previous quarter.
Further, this revenue beat analysts' average forecast for revenue of about $81.6 billion. Even better, Apple's earnings per share rose 5% year over year -- a substantial improvement over the tech company's flat growth last quarter and the 5% decline the company posted in the first quarter of fiscal 2023.
Still, it would be tough to call these results good. Solid is a better description -- that is until you adjust Apple's revenue for the significant currency headwind the company faced during the quarter. The company's revenue, adjusted to exclude foreign-exchange headwinds, is the metric investors should be careful not to overlook.
Measured this way, Apple's revenue increased 3% year over year. Pulling this off during such a tough macroeconomic environment for discretionary spending highlights the resiliency of Apple's products and services with consumers.
Even though investors should look for further improvement in Apple's revenue trends, they're good in light of the macroeconomic backdrop -- particularly when adjusted to exclude currency headwinds.
Don't underestimate this growth driver
At some point, Apple's revenue trends will have to return to robust growth rates in the mid-to-high single digits to continue justifying the stock's current valuation of about 30 times earnings. But investors might want to consider buying the stock before this occurs instead of waiting for it to happen.
By the time Apple returns to meaningful growth rates, shares could have already rebounded from this pullback. With this in mind, it's worth assessing what catalysts Apple may have under the hood that could help push growth higher over time.
The key to Apple's eventual return to top-line growth may be services. Sure, Apple's difficult-to-predict product segment, which is heavily driven by the iPhone, could easily return to sales growth, too. But the segment's growth rates are volatile and difficult to predict. Services, on the other hand, is a more predictable catalyst for Apple.
This segment, which notably has a much higher gross profit margin than Apple's product segment, generally grows faster than product revenue. This was the case in fiscal Q3 when revenue increased 5% year over year and even faster when adjusted for foreign exchange.
This faster-growing segment is already a significant portion of Apple's business, accounting for over a fifth of the company's fiscal third-quarter revenue. But it's likely to become an even bigger revenue and profit driver over time. Therefore, it will likely have an increasingly greater positive impact on Apple's business and its consolidated growth rates over the long haul.
With an installed base of over 2 billion active Apple devices -- an installed base that management said in the company's fiscal third-quarter earnings call "continues to grow at a nice pace" -- Apple has a huge addressable market to tap into to continue growing its services business as it improves its existing services, benefits from growth in third-party services, and rolls out new native services over time.
Sure, no stock is without risk. Additionally, investors should do their own due diligence before they invest in any stock. It's also worth noting that it's impossible to know where the bottom is in any pullback.
But given Apple's loyal customer base and its long history of growing earnings rapidly, this pullback may be a good time for investors to consider adding to their positions. Of course, investors should keep the position small, given the stock's premium valuation and the overall riskiness involved with rapidly changing technology companies.
