The largest position in Warren Buffett's investment portfolio is Apple (AAPL -0.82%). The Oracle of Omaha first took a position in the company in 2016. Due to generous returns over the years, Buffett's stake in Apple has ballooned to account for over half of his entire portfolio's value.
So far in 2023 Apple stock is up an impressive 42%. However, after the company's most recent earnings report, investors punished the stock for the company's less-than-stellar results.
While Apple's shrinking revenue is a legitimate concern, I believe the sell-off is overdone. Read on to see my analysis of Apple's earnings, noting both the highlights and lowlights. Moreover, using some valuation techniques, I'll show you why this could be a great opportunity to buy the dip.
What seems to be the problem?
For the three months ended July 1, Apple's revenue declined about 1% year over year to $81.8 billion. Moreover, through the first nine months of the company's fiscal 2023, Apple's revenue is down roughly 3% annually. To add some additional context, during the most recent quarter Apple's revenue shrank across several geographic regions including the Americas and Japan as well as across product segments such as iPhone, iPad, and Mac. These trends showcase that Apple has been struggling to grow its revenue for several consecutive quarters now.
On the bright side, Apple saw meaningful growth in both its wearables and its services businesses. Services generated $21.2 billion in revenue during the quarter, which represented an all-time record.
During the earnings call, management pointed out that Apple reached 1 billion paid subscriptions on its services platform. To put this into perspective, Apple told investors that it has doubled the number of paid subscriptions in just the last three years, while adding 150 million new service subscribers over the last year alone.
While it's impressive, perhaps this isn't entirely surprising. During earnings calls, Apple's management typically likes to highlight the company's active install base. Considering that Apple has 2 billion active devices around the globe, it's natural to think consumer engagement with the company's services would improve.
Investors shouldn't overlook this dynamic because even though the company has been challenged when it comes to revenue growth for several quarters now, the underlying trend is that users remain engaged.
For this reason, I do not view Apple's ecosystem as facing any sort of existential risk. Rather, due to lingering inflation and high interest rates, I believe that consumers are acting with more caution and hesitation when it comes to discretionary items such as expensive new hardware. Moreover, as management points out, consistent operational challenges in the supply chain have added an extra layer of headwind as it pertains to growth.
Image source: Getty Images.
How are investors reacting?
The stock market is an interesting place, and equities ebb and flow all the time for any number of reasons. Since the company reported earnings on Aug. 3, Apple stock is down nearly 4%.
While this may not seem like a big move, keep in mind that Apple's market capitalization was roughly $3 trillion before its earnings report. Given this math, Apple has lost well over $100 billion in value since its mixed earnings report.
Should you buy the stock?
Sure, Apple's shrinking revenue base is a big deal. However, obsessing over this fact is not entirely productive, considering the company's massive install base and the parallel growth of its services business.
Given the current macroeconomic picture, I believe that most consumers are opting to pass on new hardware upgrades at the moment. But with that said, variables such as inflation and interest rates will not go up in perpetuity.
While the current state of the consumer is cloudy, current actions from the Federal Reserve are aimed at improving the state of the economy. For this reason, consumer purchasing power should rise in the long term, and companies such as Apple could benefit greatly from an influx of demand. Given this outlook, I believe that the sell-off in Apple stock is an overreaction and now is a great opportunity to lower your cost basis in the stock.
