Wall Street has gone hot and cold on tech this year, with many of the market's stocks soaring in the first half of 2023 as excitement over artificial intelligence (AI) increased. However, the Nasdaq-100 Technology Sector index tumbled 6% since the start of August, when multiple companies posted dismal quarterly results. The decline proved many companies are still fighting against macroeconomic headwinds, which could continue into next year.
Despite the immense popularity of its products, Apple (AAPL 0.50%) hasn't come through market challenges unscathed. The company has faced repeated revenue declines, with its shares falling about 9% since Aug. 1. As a result, it's not a bad idea to learn more about this tech giant before filling up on its stock.
So here are one green flag and one red flag for Apple in 2023.
Green flag: Nearly unrivaled brand loyalty among consumers
Despite poor market conditions, Apple remains a favorite among consumers. Its dominance in tech could massively pay off over the long term once economic troubles subside, indicating that buying its recent stock dip might be a good idea.
Apple has built up immense brand loyalty with the public over the years, allowing it to snap up market share in nearly every industry it has entered. Product segments such as smartphones, tablets, smartwatches, and headphones were all led by other tech companies before Apple entered the picture. However, the company now boasts leading positions in each. Apple-exclusive apps like Messages and FaceTime, alongside an interconnected ecosystem that promotes ease of use among its devices, have won over shoppers.
The public's preference for Apple's offerings has been particularly prevalent during this economic downturn, as the company continued to outperform its peers. Data from Counterpoint Research shows that in the second quarter of 2023, U.S. smartphone shipments fell 24% year over year (YOY). Market trouble meant Samsung's sales plunged 37%. However, Apple reported a more moderate decline of 6% in the period, which allowed its smartphone market share to rise from 52% to 55%.
Global PC sales similarly fell 13% in Q2 2023. Yet, while Lenovo and Dell experienced sales declines of 18% and 22%, Apple's MacBook division actually grew 10% YOY.
Moreover, the popularity of Apple's products has bolstered its ventures into more digital markets like app sales, subscription services, and fintech. As a result, services is now the company's highest-earning division, with revenue growth consistently outpacing the iPhone (Apple's highest-earning division). Services enables Apple to lean less on its product sales during challenging market conditions, likely making its stock a reliable option over the long term.
Red flag: Vulnerable to macroeconomic headwinds
While Apple has outperformed its competitors amid market headwinds, prospective investors should be aware that its products business still makes it vulnerable to macroeconomic headwinds.
More than 70% of the company's revenue relies on product sales, with close to 50% of that owed to the iPhone. Consequently, reductions in consumer spending over the last year have been tough on growth.
In Q3 2023, Apple's total revenue fell for the third consecutive quarter, down 1% YOY after declines in three of its four product areas. The company remained profitable, achieving $23 billion in operating income. However, looming fears of a recession indicate Apple could continue to report revenue dips into the start of next year.
As a result, it's crucial to keep a long-term perspective on Apple's stock. The company remains a leader in one of the fastest-growing sectors, which suggests it will continue to offer significant gains to patient investors.
Meanwhile, at the rate services is growing, it could eventually surpass the iPhone as the highest-earning segment. Services posted revenue growth of 14% year over year in fiscal 2022, double that of the iPhone. Then, in Q3 2023, the segment hit 8% growth compared to the iPhone's decline of 2%.
Services consistently hit profit margins of around 70%, compared to products' 35%. Apple's gradual expansion in the digital market sees it playing the long game, fortifying its business by potentially decreasing its vulnerability to poor product sales. Given aggressive investment in the booming AI market, I wouldn't bet on Apple losing its status as an excellent growth stock in the coming years.
