Good performance can still lead to a drop, is Apple really that sweet?

In the quarter with frequent thundering financial reports, $Agilent Tech.USpple.US still fulfilled the market's expectation strongly. With the release of the 14 series and high growth of Mac products, Apple's net profit still exceeded $20 billion this quarter. However, without considering the rectification of inflation expectations since last night, Apple's stock price still showed a downward trend.

1) Why is Apple's financial report steady, but its stock price frequently drops?

The frequent drop in the stock price mainly comes from market concerns. As Dolphin Analyst mentioned in the financial report review in "Apple: the only giant that did not fall, how much longer can it last?", potential risks include: "1) the 14 and 14 Plus in the iPhone business may create pressure on Q4 earnings; 2) Mac business will experience a decline in shipments after channel replenishment; 3) softness in software services may continue into Q4."

Across the electronic product market, there is no apparent sign of recovery in several main products such as smartphones, computers, and tablets. The global smartphone and tablet market declined by nearly 10% in the third quarter, and the global personal computer (PC) market declined by almost 15%. Although Apple's market share increased in these main product markets, the "inversion of the king" will inevitably be affected by the industry. With the joint effort of filling Mac inventory and the pre-release of new products, the results of this quarter's financial report finally met market expectations. On the other hand, pre-release of the product launch will create pressure on next quarter's financial report performance, making the market mainly concerned about the company's performance in the next quarter.

In this quarter, due to the impact of the epidemic and other factors on the supply chain, companies such as Foxconn may have some impact on the supply of iPhone new products, while $Genpact.USoerTek.SZ AirPods events have deepened product supply problems. Therefore, it is difficult for Apple's next quarter financial report to satisfy the market.

2) So, in the current market situation, how should we view Apple's investment?

Based on industry and company situations, Dolphin Analyst split Apple's businesses and made predictions. Dolphin Analyst forecasts that Apple's revenue and net profit will maintain a compound growth rate in the single digits over the next five years. By the fiscal year 2027, Apple's revenue will exceed $500 billion, and its net profit will reach $150 billion.

With the current ten-year US Treasury bond yields rising to around 4%, Dolphin Analyst uses 4% as a neutral judgement for the risk-free rate and also performed sensitivity analysis using different WACC.

Under the neutral judgement, when Dolphin Analyst raises the risk-free rate to 4% (corresponding to a WACC of 9.93%) during DCF valuation, the corresponding company DCF valuation is a total market value of $22 trillion, corresponding to $138 per share, which does not show a significant space compared to the current stock price ($146 per share). On Investment Advice: Although Apple is one of the most stable performers among American tech stocks, with an annual profit of billions of dollars, Dolphin Analyst believes that there is currently no obvious investment opportunity given the company's stock price. However, if there is a chance for the company's stock price to significantly deviate from the target price in the future, it will be more worthwhile to invest.

For Dolphin's analysis and investment judgment on Apple's business, please see below:

1. How is each of Apple's businesses doing?

To see how Apple's financial reports are doing, we must first take a look at the company's business composition. Apple's business model mainly consists of hardware sales and software services to generate profits.

1) Hardware Business: It accounts for 80% of Apple's revenue and is the company's largest mainstay. Driven by the Mac business this season and the autumn product launch, the company's hardware business still performed well. In particular, the Mac business achieved a year-over-year growth of 25%+, providing support to the overall hardware side;

2) Software Business: It is greatly affected by macro factors, and its growth rate has fallen to single digits this season. Dolphin Analyst believes that the slump in Apple's software business growth this season is partly due to the slowdown in hardware shipments, which has affected user growth; and partly due to macroeconomic factors affecting users' willingness to pay.

2. How is Apple's iPhone business performing?

This season, Apple's iPhone business grew by 9.7% year over year, meeting market expectations. The growth in shipments this quarter was in single digits, while the rest of the growth came mainly from the overall increase in prices.

① Growth in shipments: In the context of a nearly 10% decline in the smartphone market, Apple's growth mainly benefited from the increase in market share within the market. Apple's market share this season increased to more than 17%, significantly higher than the historical same period;

② Overall price increase: In this year's new product launch, Apple canceled the original mini model and added a more expensive plus model. At the same time, the launch of the "Smart Island" in the pro series this year increased the proportion of high-priced pro series shipments. The overall delivery price of Apple's phones is still on the rise.

③ Dolphin Analyst believes that last season's iPhone business performed well mainly due to the front-loading effect of the product launch and the overall increase in prices. Compared to last year, this year's product launch was a week earlier, which effectively brought the sales of the busy season forward by a week. Through the advancement of the product launch, Apple appeared to have avoided the overall market downturn in terms of shipments. However, Dolphin Analyst believes that the issue of shipments may become evident in the fourth quarter, and coupled with the impact of the epidemic on suppliers such as Foxconn, the company's iPhone business in the next quarter will be under pressure and Apple will not be able to avoid the impact of the overall market downturn.

2) Other Hardware Business

Apple's other hardware businesses have their own strengths and weaknesses, and while they are still better than the industry overall, they all have some issues.

①Mac Business: The Mac business grew 25.4% year-on-year this quarter, far exceeding market expectations. This unexpectedly high growth mainly comes from a 30%+ increase in shipments.

In fact, if we look at the global personal computer market (PC market) in Q3, the overall market declined by nearly 15%. Only Apple saw a counter-trend high growth of 30%+, and its market share also saw a breakthrough increase. Why is this?

However, if we trace back a quarter to Q2, we will find that Apple's shipment performance was particularly poor. The Dolphin Analyst believes that although Apple's computers have performed better than the industry overall since they adopted their own developed M-series chips, the performance in Q2/Q3 was mainly due to the supply chain being greatly affected by the pandemic in Q2, and the high growth in Q3 was partially used to meet the supply chain's restocking needs.

The Dolphin Analyst believes that the company's shipment performance in Q2 and Q3 is special, and when we look at Q4, the company's Mac shipments may decline compared to Q3. However, in the medium term, as Apple continues to launch self-developed chip products, it is expected to further increase the Mac's market share.

②iPad Business: The iPad business decreased by 13.1% year-on-year this quarter, continuing to fall short of market expectations. The underperformance of the iPad was mainly due to the overall tablet market.

The outstanding performance of the tablet market in the past two years was mainly due to the promotion of home office and home entertainment needs brought about by the pandemic. However, with the restoration of offline life after the pandemic, the tablet market has continued to decline. The global tablet market declined by 9% year-on-year in Q3.

The iPad's market share still stands at 37.6% this quarter, indicating that consumers are still willing to choose Apple's tablets. However, due to the overall market downturn, this also affects the performance of Apple's business.

The Dolphin Analyst believes that after the pandemic's impact fades away, it will be difficult to see a warming trend in the tablet market's demand. The company has also relatively weakened its emphasis on the iPad business, and the new products released in October did not hold a launch event or promotion. Without significant innovation, this business will gradually trend towards a relatively stable state.

③Wearable and other hardware businesses: The wearable and other hardware business in this quarter saw a year-on-year growth rate of 9.8%, reversing the downward trend of the previous quarter. The growth of this business in this quarter is mainly due to the release of new products.

During the release event in the second half of the year, Apple brought new AirPods and iWatch models, which, although not very innovative, still drove the growth of the business due to the release of new products.

Dolphin Analyst believes that wearable and other hardware products are also unlikely to experience significant growth in the fourth quarter. First, the new products of headphones and watches have not achieved explosive market success. Secondly, recent supply chain issues have had some impact on the shipment of certain products. To maintain double-digit growth in wearable products in the long run, new star products are needed to drive growth.

2. Is Apple a good investment?

After reviewing Apple's business and the overall industry situation, let's take a look at whether Apple is currently a good investment. Dolphin Analyst mainly refers to Apple's performance estimation and DCF valuation for reference.

1) Income Estimation

Based on the above review of Apple and industry conditions, Dolphin Analyst made corresponding forecast assumptions for Apple's various businesses.

①iPhone Business: Under the influence of recession expectations, Dolphin Analyst predicts that Apple's mobile phone shipments next year may only achieve a slight increase, and growth will still depend mainly on the increase in the average selling price of mobile phones. On the basis of a low base in the following year, the growth rate may rebound slightly, but as the overall smartphone market has matured, the increase will mainly rely on internal competition. In the next five years, Dolphin Analyst expects single-digit compound growth in Apple's mobile phone shipments, while the overall average selling price of mobile phones may still rise by single digits.

②iPad Business: It will still be affected by the epidemic, but the overall impact will weaken. In the absence of significant innovations in the iPad, the business may still see some decline, but the decline will lessen. Currently, Apple has lowered its focus on the iPad business, and Dolphin Analyst expects the overall iPad business to remain relatively stable over the next five years.

③Mac Business: After the use of self-developed chips, Apple's Mac business has maintained a growth trend and currently occupies about 8% of the market share. Referring to the current market share of iPhone, Dolphin Analyst predicts that Mac's market share will continue to increase in the next five years and will exceed 10%.

④Wearable and other hardware business: In the past, the growth of this business was mainly driven by AirPods and iWatch, but as the market penetration rate of these two products has reached a bottleneck, new explosive products are needed to drive growth in the future. In the absence of innovation, Dolphin Analyst predicts that this business will maintain single-digit compound growth over the next five years.

⑤Software business: Starting from the quantity and price perspective. Since software monetization relies on the foundation of hardware users, and with the slowdown in hardware growth, the overall user growth on the software side will also slow down. As for the monetization aspect of single users, it is actually related to the macro environment and the willingness of single users to pay. Dolphin Analyst expects that under the expectation of declining in the next two years, the willingness of users to pay will weaken. Afterwards, it is expected to continue to increase, but the single user's monetization ability is difficult to return to the high growth of the past. Dolphin Analyst estimates that Apple's revenue in the next five fiscal years will continue to maintain single-digit compound growth, and Apple's total revenue is expected to surpass $500 billion by 2026.

2）Net profit estimate

From revenue to net profit, Dolphin Analyst mainly makes assumptions about the company's gross profit margin and operating expense ratio for its products:

①Regarding gross profit margin: the company's hardware business gross profit margin is expected to continue to rise steadily on the current basis, mainly benefiting from the price increase driven by the overall iPhone business; the software business's gross profit margin will remain above 70%, but with the weakening of the user scale effect, there is little room for improvement in the gross profit margin of the software business;

②Operating expense ratio: Referring to the company's historical situation, the company has always kept the research and development expense ratio and sales/management expense ratio at around 12-13% all year round. Dolphin Analyst expects that the company will continue to control the operating expense ratio near the 12-13% level.

Dolphin Analyst estimates that Apple's net profit in the next five fiscal years will also maintain single-digit compound growth, and Apple's net profit is expected to surpass $150 billion by 2027.

3）DCF valuation

After this financial report, Dolphin Analyst adjusted the profit forecast for Apple and still referred to DCF valuation in investment.

Based on the current 10-year US bond maturity yield rising to around 4%, Dolphin Analyst takes the risk-free rate as 4% as a neutral judgment and also makes sensitivity judgments for different WACC.

Under a neutral judgment, when Dolphin Analyst raises the risk-free rate to 4% in the DCF valuation (corresponding to a WACC of 9.93%), the corresponding company's DCF valuation is a total market value of US$22 trillion, corresponding to US$138 per share, and there is no obvious space compared to the current stock price (US$146 per share).

Although Apple is one of the most stable performance technology stocks in the United States and can achieve billions of dollars in profit every year, combined with the company's stock price, Dolphin Analyst believes that the current company has no obvious investment space. If there are opportunities for the company's stock price to deviate significantly from the target price in the later stage, it will have more investment value.

Dolphin Apple Historical Article Review:

Financial Report Season

October 28, 2022 Phone Meeting "Apple: The peak season is not prosperous, and the "Roll King" cannot escape the decline (FY2022Q4 Phone Meeting)"

October 28, 2022 Financial Report Review "Apple: The only giant that hasn't fallen, how much longer can it survive?"

July 29, 2022 Phone Meeting "Only iPhone business can cover the shame, how will the management explain (Apple Phone Meeting)"

July 29, 2022 Financial Report Review "The slightly growing iPhone has become Apple's last "fig leaf""

April 29, 2022 Phone Meeting "Apple gives a weak guidance due to multiple factors (Minutes of the Phone Meeting)"

April 28, 2022 Financial Report Review "Crazy money-making Apple, should worry about growth! | Financial report season"

January 28, 2022 Phone Meeting "Apple: Supply crisis eased, innovation ignited true technology (Minutes of the Phone Meeting)"

January 28, 2022 Financial Report Review "Apple's hard strength, sweet and fragrant again | Reading financial reports"

October 29, 2021 Phone Meeting "After the performance expectations fell short, what did the Apple management communicate?"

October 29, 2021 Financial Report Review "Expectations fell through, Apple's answer sheet was embarrassing" 2021 July 28 Phone Meeting "Apple Pentathlon Exceeds Expectations, Management Interpretation (Complete Q&A)".

2021 July 28 Financial Report Review "Apple: The Definition of Excellence, Pentathlon Exceeds Expectations".

2021 April 29 Phone Meeting "Apple 2021 Q2 Performance Meeting Summary".

2021 April 29 Financial Report Review "Excellent Companies Always Exceed Expectations, Can Apple Be Tough Enough in the New Quarter!".

2021 April 25 Financial Report Preview "After the Overbearing Quarterly Report, Will Apple's New Quarter Report Continue to Explode?".

In-Depth

June 17, 2022 "Consumer Electronics 'Mature', Apple Tough, Xiaomi Painful".

June 6, 2022 "US Stocks Shake, Is Apple, Tesla, Nvidia Being Wrongly Killed?".

February 28, 2022 "Apple: Cost Pressure Passed On, I Respect You!".

December 6, 2021 "Apple: Dual-Driven Gradual Weakness, 'Limping' Hardware Urgently Needs Big Single Product Endurance".

Live Broadcast

September 8, 2022 "Apple 2022 Autumn Release Conference".

April 29, 2022 "Apple Inc. (AAPL.US) 2022 Q2 Performance Phone Meeting".

January 28, 2022 "Apple Inc. (AAPL.US) 2022 Q1 Performance Phone Meeting". 2021 October 29th "Apple (AAPL.US) 2021 Q4 Earnings Call" (https://longbridgeapp.com/lives/3097?channel=nl3097&invite-code=032064)

2021 October 19th "Apple October New Product Launch Event" (https://longbridgeapp.com/lives/2794?channel=nl2794&invite-code=032064)

2021 September 15th "Apple 2021 Autumn Launch Event" (https://longbridgeapp.com/lives/2429)

2021 July 28th "Apple (AAPL.US) 2021 Q3 Earnings Call" (https://longbridgeapp.com/lives/747)

2021 April 29th "Apple (AAPL.US) 2021 Q2 Earnings Call" (https://longbridgeapp.com/lives/28)

2021 April 21st "Apple Spring New Product Launch Event" (https://longbridgeapp.com/lives/21)

Risk Disclosure and Statement: Dolphin Analyst Disclaimers and General Disclosures (https://support.longbridge.global/topics/misc/dolphin-disclaimer)