Macroeconomic Conditions Hurt Apple, Yet …

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Earlier last week, Apple (Nasdaq: AAPL) announced its first quarter results that failed to meet the market’s expectations. Apple attributed the miss in performance to three key factors – a strong dollar, production issues in China, and the overall macroeconomic environment. However, the silver lining is its growth in the Services Segment and its thriving ecosystem.

Apple’s Financials

Apple’s first quarter revenues fell 5% to $117.2 billion, significantly behind the market’s forecast of $121.1 billion. EPS fell to $1.88, falling short of the Street’s forecast of $1.94.

By segment, iPhone revenues fell 8.17% to $65.78 billion versus the analyst estimate of $68.29 billion. Mac sales fell 28.66% to $7.74 billion, falling short of $9.63 billion revenues expected from the segment. iPad sales grew 29.66% to $9.4 billion, higher than the market estimate of $7.76 billion. Revenues from Wearables fell 8.3% to $13.48 billion. The services segment revenues grew 6.4% to $20.77 billion, ahead of the estimated $20.67 billion.

Apple expects that the 5.5% decline in revenues will continue into the second quarter. The market estimates revenues of $92.96 billion with an EPS of $1.43 for the second quarter and revenues of $388.54 billion with an EPS of $5.98 for the year.

Apple’s Product Expansion

Apple continued to focus on product expansion to drive revenue growth. Recently, it introduced new MacBook Pro models powered by its latest developments in Apple silicon, M2 Pro, and M2 Max. These chips enable unprecedented performance and do so with less energy. It also introduced the M2-powered Mac Mini that will increase productivity for users. During the quarter, iPad revenue had an impressive growth of 30% to $9.4 billion primarily due to favorable compares to the December quarter a year ago when Apple was struggling with significant supply constraints.

Apple’s Wearables, Home and Accessories revenues fell 8% due to foreign exchange headwinds and a challenging macroeconomic environment. Apple has recently released new products for the segment. It recently announced the next-generation HomePod, which relies on advanced computational audio to produce an improved listening experience. Apple is also helping users make their homes safer with sound recognition by embedding features like transmitting smoke or carbon monoxide alarms to the user’s phone. The Apple Watch is also improving its health and safety features such as the emergency SOS via satellite that was recently launched for iPhone 14 customers.

Last quarter, Apple released Freeform, a new app that helps users collaborate in real time. Freeform is gathering positive reviews for its flexibility and simplicity as it works seamlessly across iPhone, iPad, and Mac.

Recently, Apple announced new educational resources to help customers control their data. The new resources explore features including Mail Privacy Protection, Safety Check, Location Services, and passkeys to allow users to customize each feature based on their own preferences.

Apple’s Growth Segments

Apple’s ecosystem continues to expand. It now has over 2 billion active devices as part of its growing installed base with user base doubling in just over seven years.

Apple’s Services segment remains its biggest growth segment. It set an all-time revenue record of $20.8 billion in services, recorded double-digit revenue growth from App Store subscriptions, and now has more than 935 million paid subscriptions. Services net sales growth in the December quarter were highest for its cloud services, the App Store, and music.

The App Store returned to an estimated 7% growth in the December quarter after two quarters of flat y-o-y App Store performance. To continue to improve content, Apple has recently begun a 10-year partnership with Major League Soccer. It launched an MLS Season Pass that will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup. Besides sports, its other award winning content line up continues to grow with the addition of movies like Spirited, series like Shrinking, Slow Horses, and Truth Be Told, along with newer seasons planned for Emmy Award winner Ted Lasso.

The near-term macro economic headwinds are affecting Apple currently, but it still seems to be a good long-term bet.

Its stock is trading at $153.85 with a market capitalization of $2.4 trillion. It touched a 52-week high of $179.61 in March last year and a 52-week low level of $124.17 in December last year.

Disclosure:?All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in this company.

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