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Apple - first drop in sales in three-and-a-half years

Apple reported first quarter net sales of $117.2bn, down 5.5% year-over-year and below analyst consensus.

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Apple reported first quarter net sales of $117.2bn, down 5.5% year-over-year and below analyst consensus.

The decline was attributed to currency headwinds, supply disruption in China and a more challenging macroeconomic environment. iPhone sales fell 8%, there were also declines in Mac and Wearables.

Operating profit fell 13.2% to $36bn, largely a result of higher research and development spend along with lower sales.

Free cash flow of $30.2bn was down from the $44bn reported last year. Net debt stands at $50bn, not including $114bn held in investments.

A dividend of $0.23 per share was announced.

Shares were down 3.2% in out-of-hours trading.

View the latest Apple share price and how to deal

Our View

Apple's kicked off the new financial year in a similar to vein to how it ended the last, with markets disappointed.

Another quarter of weaker iPhone sales is a problem, but it's demand that's the real key here. Looking under the hood, sales declines were largely a result of a weaker US dollar and significant production disruption in China. The latter of which has since been resolved.

In fact, sales would have been flat if it weren't for currency moves, and the number of active iPhones is at an all-time high. That's good news for the Services arm - things like the App store or Apple Music - can't ensnare customers unless the phones and watches are being used.

Of course, consumers aren't immune to wider economic pressures and we're seeing that weakness through the broader hardware category. It's always a warning sign when management don't give specific revenue guidance, as was the case on Apple's first quarter earnings call. But broadly speaking, performance is expected to continue at this current pace into the next quarter.

Looking to key battle grounds, China remains front and centre. Not only is this a manufacturing lynch pin, but an increasingly important area for sales. Production disruptions impacted supply for large parts of December and whilst we didn't get any specifics, we expect to see production slowly shift away from China over the medium term.

The demand environment in China should improve though. Having been hit with a slew of lockdowns over 2022, the picture finally looks to be improving. CEO, Tim Cook, was keen to keep a lid on too many details, but hinted at a marked improvement across December and into January. We'll have to wait for second quarter results to see the true impact.

Challenging conditions come and go, but what seem unshakeable is Apple's biggest asset: 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 unbendingly loyal customer base means that there's an element of revenue visibility other businesses simply don't have.

That's not to say investors should ignore the competition. Competitors are closing the gap. Some 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.

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've little doubt in Apple's ability to deliver, but those strengths are well priced in. The valuation sits comfortably ahead of the longer-term average meaning ups and downs are more likely.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 3rd February 2023