Apple FQ1 2023: More gloom and doom awaits

Apple Inc.’s fiscal first quarter results suggest a slump. They were in line with the supply-constrained holiday shopping season for its best-selling premium iPhones, and a deteriorating consumer backdrop. The tech giant reported revenue of more than $117 billion, underperforming consensus estimates of $122 billion; earnings rolled in at $1.88 per share, also missing consensus estimates slightly by $0.07.

What mattered more for investors, though, was management’s commentary on the near-term outlook, given mixed data on where mounting macroeconomic uncertainties from last year might be headed. In the previous quarter, Apple CFO Luca Maestri had already warned of headwinds in the macroeconomic environment that would continue to impact the company’s consumer-centric business heading into the new year, in addition to persistent FX challenges as well as a tough PY comp that had benefitted from the launch of new MacBook Pros fitted with the M1 chips. And things have likely remained largely consistent with management’s previous conservatism.

Looking ahead, Apple’s near-term demand environment remains blighted by the weakening consumer, though few moderate tailwinds have surfaced, including a weakening dollar as the pace of monetary policy tightening slows, and a product upgrade cycle that could boost sales and complement a softer PY comp later in the year. But on a net basis, growth is likely expected to decelerate further and remain subdued in much more moderate levels from the pandemic era boom. While a consistent revenue mix shift to the higher-margin services segment should continue to reinforce the tech giant’s bottom line, the company likely faces near-term cost inefficiencies stemming from ongoing investments into new technology (e.g., in-house silicon; mixed reality headsets) as well as the gradual diversification of its supply chain. The lack of significant cost-optimizing efforts observed from the tech giant so far – other than axing the size of CEO Tim Cook’s compensation package and staying cautious on hiring new talent – paired with the stock’s valuation premium still makes it less appealing to investors that have largely turned risk-on towards those that have actively sought to bolster the bottom-line through reduction in forces and project cancellations without materially compromising performance.

Admittedly, it has been a phenomenal couple of quarters for Apple, being the most exposed to the weakening consumer, yet also the most resilient among peers, underscoring the strength of its ecosystem and commanding installed base. However, the anticipated continuation of consumer weakness over the coming months will remain an overhang on both of Apple’s products and services segments, despite growing evidence that inflation pressures are back on track down to the Fed’s target 2% range and supportive of easing financial conditions. Essentially, the after-effect of the Fed’s aggressive inflation-reining campaign over the past year that is likely to play out with further deterioration in the consumer over coming months will likely cap Apple’s near-term sales. This effectively elevates demand risks facing the company, creating a tough operating backdrop for the tech giant that could further expose the stock’s vulnerability to looming macroeconomic uncertainties that remain on the horizon.

Fading Resilience Among the Slowing Consumer
While recent economic data continues to support that peak inflation is now behind us and onto a consistent path back towards the Fed’s target 2% range, which has markets speculating that the Fed’s recent acknowledgement that inflation has showed “a welcome reduction” and decision to slow the pace of rate hikes further could be supportive of a pivot before the end of the year, consumer spending is likely to deteriorate further as aggressive monetary policy tightening prescribed over the past year continues to work through the economy. SeekingAlpha