Apple Inc. – Expecting revenue contraction May 8, 2023 254

PSR Recommendation: ACCUMULATE Status: Downgraded
Target Price: USD183.00
  • 2Q23 results were within our expectations. 1H23 revenue/PATMI at 53%/54% of our FY23e forecasts.
  • Revenue contraction was lower than company guidance due to better-than-expected iPhone sales. Gross margin expanded by 130 basis points QoQ.
  • 3Q23 guidance is for revenue YoY decline of around 2%-3% with gross margin remaining stable QoQ. Weakness due to product revenue facing challenges from the macro conditions.
  • We cut our FY23e revenue by 5% and PATMI by 4% to account for expected continued revenue contraction in 3Q23. We downgrade from BUY to ACCUMULATE rating with a lowered target price of US$183.00 (prev. US$186.00), with a WACC of 6.5%, and a terminal growth rate of 3%. We forecast FY23e revenue to contract relative to FY22 as sales are expected to continue declining in 2H23e, with positive growth returning in FY24e.


The Positives

+ Revenue beat company guidance. Revenue dipped 2.5% YoY to US$94.8bn, lower than company guidance of 5% YoY contraction due to better-than-expected iPhone sales. iPhone revenue grew 2% YoY to US$51.3bn despite FX headwinds and challenging macro conditions, driven by strong growth in emerging markets with revenue doubling in India, Indonesia, Turkey, and UAE. Mac/iPad revenue were down 31%/13% YoY, in line with guidance, as both products faced challenging comparisons and macro conditions. Services revenue grew 5.5% YoY (~11% in constant currency) to US$20.9bn, on top of a tough comparison against 2Q22 where it grew 17%. Apple indicated it has >975mn paid subscriptions, 2x from 3 years ago and up from 935mn disclosed in 1Q23.


 + Sequential gross margin expansion. Services gross margin expanded 20 basis points QoQ to 71%, partially offset by QoQ product gross margin contraction of 30 basis points to 36.7%. Overall gross margin expanded by 130 basis points QoQ to 44.3%, largely driven by favourable revenue mix towards Services (22% of total vs 18% in 1Q23) and cost savings.  


The Negatives

– Revenue contraction to continue. Apple guided YoY revenue performance in 3Q23 to be similar to that of 2Q23, implying a potential contraction of 2%-3%, with FX expected to be a headwind of 4%. This is below our initial expectation of positive sales growth in 2H23e. Services YoY revenue performance is also expected to be similar to its growth in 2Q23, suggesting a continued increase at ~6%, while facing challenges in digital advertising and mobile gaming due to the macroeconomic environment.


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Profile photo of Maximilian Koeswoyo

Maximilian Koeswoyo
Research Analyst

Maximilian mainly covers the US technology sector. In his strive to be a globalized citizen and get continuous exposure to the fundamentals of companies from various industries, he graduated from Singapore Management University holding a Bachelor’s degree in Business Management.

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