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Apple - better than expected but guidance disappoints

Apple's net sales fell almost 1% to $89.5bn.

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Apple's net sales fell almost 1% to $89.5bn. iPhones and Services were the only product areas to grow, with the former seeing net sales of $43.8bn up from $42.6bn. Services rose from $19.2bn to $22.3bn. The heaviest declines in net sales came from Macs, but iPad and Wearables also fell.

Well controlled costs meant operating profit rose 8.3% to $27.0bn. Apple generated free cash flow of $99.6bn and had net debt of $49.5bn as at the end of the period.

Overall performance was better than expected. But the outlook for the new quarter has come in lower than analysts expected. iPhone sales are expected to be flat, compared to hopes of 5% growth.

A dividend of $0.24 was announced.

Apple shares fell 3.4% in after-hours trading.

View the latest Apple share price and how to deal

Our view

Apple's stumbled across a bump in the road. The outlook for the new financial quarter has disappointed markets.

One tripwire is uncertain consumer demand. It's increasingly hard to gauge the response to tough economic conditions. While the new iPhone 15 has performed well, other hardware items haven't. And we're inclined to think asking people to upgrade their new iPhones has become a much harder task. The January numbers will be crucial in understanding how customer confidence is holding up.

Another note of caution stems from competition in China. Other big names like Huawei are taking Apple head on, and taking some local revenue in the process. Some competitors have an even larger installed product base and offer better prices. If Apple's brand ever slips - like we've seen with some heavily branded clothes - the shine would very quickly rust on that famous tiny apple.

This isn't an overt concern right now, but it is something to monitor.

We're encouraged by progress in Services - things like the Appstore and Apple Music. This area of the business is higher margin because adding new users doesn't involve the same costs involved as building a MacBook or iPhone. But for Services to reach its full potential, it relies on growing hardware sales occurring in the first place. To that end, we'd like to see hardware pick up the pace.

While there are some extra risks to be considered, Apple's biggest asset remains its brand. The sheer scale of Apple's sales is testament to the grip that the shiny embossed piece of fruit has on global consumers. The loyal customer base means that there's an element of revenue visibility other businesses simply don't have.

We're also mindful that Apple's valuation has reached slightly more palatable levels, and doesn't necessarily reflect the potential future strength, especially from Services. Despite this, the valuation is still elevated compared to the ten year average, which does increase sensitivity amid the uncertain consumer backdrop. The group generates significant free cash flow, which we don't see as under threat.

Overall, we think Apple remains strong, but future spoils still rely on growing higher-margin areas of the Service business, while creating another generation of coveted products. We continue to have faith in Apple's ability to deliver, but competition concerns in the important Asia region have become slightly more prominent and this can increase the risks of ups and downs.

Apple key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 3rd November 2023