Apple Q1 results miss estimates as iPhone revenue drops

By Yasin Ebrahim and Geoffrey Smith

Investing.com - Apple (NASDAQ:AAPL) stock fell in premarket trading on Friday, after its first quarterly sales drop in over three years forced investors to confront the risk of a permanent slowdown in growth.

The iPhone maker had a tough start to its fiscal year, which includes the key holiday season. Revenue from its flagship iPhones fell 8% and there were bigger declines in wearables and PCs, all hurt by the increasingly rapid deflation in demand for gadgets as the pandemic boom ended.

On top of that, the company had faced serious supply chain problems in the quarter, as workers at contract manufacturer Foxconn's (TW:2317) plant in Zhengzhou revolted against the working conditions imposed at the peak of China's COVID-19 wave.

Those problems were partially offset by continued growth in its services unit, which includes Apple TV and the App Store, while iPad sales rebounded from a weak comparative base.

Overall revenue fell 5% to $117.2 billion, although that figure was made to look worse by the dollar's strength. In constant currency terms, they were flat from last year. Adjusted earnings per share fell more steeply, by 11%, to $1.88, missing forecasts for $1.94.

To some, the numbers bore out concerns that the stock, which has multiplied fourfold since 2019, is due to a significant re-rating, as higher interest rates, squeezed consumer incomes, and a more mature business profile all point to slower rates of growth in the future.

However, analysts were quick to bat away such concerns, arguing that the quarter was abnormally weak due to the production issues in China, and that the outlook for continued growth through services and wearables is still bright. They also point to its strong balance sheet and its record of abundant cash flow and shareholder payouts.

Analysts at Citi expect Apple's revenue to fall 1.5% in the year through September, due largely to problems in the last quarter, but expect it to resume growing in the following year, by over 6%. They noted that a worldwide installed base of over 1.2 billion devices can't help but generate substantial replacement and upgrade demand, as well as generate more service revenue going forward. They rate the stock 'buy' with a target price of $175, 16% above Thursday's close.

Evercore analysts likewise stressed the stability and solid downside protection of Apple's business, saying the report "continues to validate not just the diversity of AAPL’s revenue stream but also highlights the ‘consumer staple’ nature of iPhones," in contrast to perceptions of the iPhone as a discretionary spending item. They also rate the stock outperform, with a $190 target.

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