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Apple: It could have been worse

After the bell on Thursday, we received fiscal third quarter results from Apple. The technology giant was my number one stock to watch this earnings season, given the worries we’ve seen over consumer spending recently. The company ended up doing alright with its quarterly numbers, and investors cheered as things certainly could have been worse.

For the quarter, Apple came in with total revenues just under $82.96 billion, which was a little less than 1.9% growth over the prior year’s June period. The company stated that it lost over three percentage points of growth due to currency issues and the Russian business impact. This sales number missed overall estimates by just a hair if you look at estimates on Seeking Alpha, but by more than a billion dollars if you look at the Apple 3.0 quarterly estimates survey. In the graphic below, you can see how key items fared against the last two fiscal Q3 periods. For the items that use percentages like gross margins, the change is the actual percentage change and not the rate of change.

If I use the Apple 3.0 numbers, the iPhone did very well, coming in more than a billion dollars ahead of the overall survey average. How much strength the smartphone line continued to show on this 5G upgrade cycle was a key question I had in my earnings preview article, as we’re less than two months away from the expected unveiling of four new phones. On the flip side, the Mac line missed by a similar dollar amount, thanks to supply constraints in China due to COVID shutdowns, and wearables came in about a billion short. The iPad line only slightly missed estimates, while services were about $400 million below expectations.

I had mentioned in my preview article that analysts were expecting a bit of margin compression, but Apple did come in ahead of the street. Products were likely to see some margin headwinds from the stronger dollar and rising prices of key components. However, increasing services margins and that segment becoming a large portion of the company’s total revenue base almost all but offset those losses. When it came to the bottom line, Apple beat by a nickel per share, although that was still down a dime over the prior year period despite help from the buyback program.

Management certainly took advantage of lower stock prices in the quarter to continue rewarding investors. Apple detailed $21.7 billion worth of share repurchases during Q3, bringing the buyback’s total to more than $529 billion since the program started roughly a decade ago. With another quarter like this in the September period, Apple will eclipse $700 billion in total capital returns over this time frame.

When I look at what was said on the conference call, I wasn’t really impressed overall. Management kept talking about currency headwinds hurting results, but this isn’t exactly a new item or a major surprise. I’ve been talking about a stronger dollar impacting multinational companies like Apple for months. We’ve seen companies that reported over the last few weeks detail calendar Q2 results hurt by the stronger dollar, with guidance calling for even more pain in the current calendar quarter.

Also, just saying that growth is expected to accelerate in fiscal Q4 doesn’t exactly calm fears of a consumer slowdown. Analysts went into Thursday’s report expecting more than 8% growth in the September quarter compared to less than 2% growth for the June period. I know management doesn’t want to give a precise forecast given all the uncertainty out there, but for example 4% growth in fiscal Q4 is an acceleration of growth from the June period, and that number still would be well below current street estimates.

As for Apple shares, they rallied 3% in Thursday’s after-hours session. They might have rallied a bit because Amazon (AMZN) soared after its results, so large cap tech as a whole got a boost. Apple shares also jumped above their 200-day moving average, which helps the technical picture a bit. My only worry here is that the stock is now up $33 from its June low, so I don’t know if there is a lot more short term upside here. There was a lot of buying going into this report, and I don’t think it was enough to get shares close to their all-time highs until we get more data on consumer spending and the Fed’s plans over the next couple of months. As I mentioned previously, this year’s iPhone lineup may not be strong as the past couple of years, so that could provide a headwind to sales over the next couple of quarters.

In the end, Apple reported an okay quarter, but it was good enough to send the stock higher after the bell. Q3 revenues weren’t that impressive, especially since we knew the currency headwinds and supply constraints that the company was facing. Earnings per share beat as margins did impress, which is likely due to the iPhone doing rather well. Q4 guidance didn’t tell us a lot that we didn’t already know, as analysts were expecting growth to jump a bit in the September period. For now, Apple remains a long-term hold, but I wouldn’t necessarily be adding after these results. Seeking Alpha

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