Apple (AAPL +1.16%) posted its latest earnings report on May 2. For the second quarter of fiscal 2024 (which ended on March 31), the tech giant's revenue fell 4% year over year to $90.8 billion but exceeded analysts' estimates by $190 million. Net income dipped 2% to $23.6 billion, but the company's $43.3 billion in buybacks boosted its diluted EPS by a penny to $1.53 and cleared the consensus forecast by $0.03.
Apple's growth rates were anemic, but it boosted its quarterly dividend by 4% to $0.25 a share, which translates to a forward yield of 0.5%; and authorized a new $110 billion buyback plan, which is equivalent to 4% of its market cap.
Image source: Apple.
Apple's stock rallied after the report, but it's only advanced about 8% over the past 12 months as the S&P 500 rallied 22%. Will Apple's stock head higher over the next 12 months, or will it continue to underperform the market?
Apple's three biggest problems
Apple faces three problems: declining iPhone sales (which accounted for 55% of its revenue in the first half of fiscal 2024), sluggish sales of Macs, iPads, and other hardware devices; and regulatory headwinds for its services business.
Apple's iPhone sales declined 10% year over year in the second quarter, compared to its 6% growth in the first quarter and 2% decline in fiscal 2023. Some of that slowdown can be attributed to the end of the 5G upgrade cycle, but it also faced macro and competitive challenges in China. According to Counterpoint Research, Apple's iPhone sales in China dropped 19% year over year in the first quarter of calendar 2024 as Huawei, Honor, and Xiaomi gained ground.
Apple's second quarter iPhone sales also faced messy comparisons to the prior year quarter, when it aggressively ramped up its shipments of higher-end iPhones to bounce back from its pandemic-induced supply chain disruptions. Excluding that one-time $5 billion boost to its sales last year, its iPhone sales would have grown year over year in the second quarter.
NASDAQ: AAPL
Key Data Points
Apple's Mac sales rose 4% year over year in the second quarter, accelerating from its 1% growth in the first quarter and 27% decline in fiscal 2023. That recovery, which it attributed to the strong launch of the new MacBook Air, suggests the laptop and desktop PC markets are gradually recovering from their post-pandemic declines.
The company's iPad sales still fell 22% year over year in the first half of fiscal 2024 -- compared to its 3% decline in fiscal 2023 -- but it expects the business to finally return to double-digit growth in the third quarter. However, its Wearables, Home, and Accessories revenue dropped 11% in the first half of fiscal 2024 as it struggled to sell more Apple Watches and AirPods.
Apple's core growth engine was still its Services business, which grew 13% year over year and accounted for 22% of its top line. That marked an acceleration from its 9% growth in fiscal 2023. Apple expects its Services revenue to grow by the double digits in the third quarter, but antitrust regulators in Europe and the U.S. are trying to tear down that walled garden by challenging the company's policies regarding third-party payments and apps which directly compete against its first-party services. That pressure could reduce the stickiness of its services ecosystem, which already serves more than a billion subscribers.
Apple's plans are murky and its valuation is high
Apple plans to sell more iPhones in India and other emerging markets to reduce its dependence on China, but it could still face stiff competition from cheaper Android devices. Its Mac and iPad sales should gradually stabilize, but they won't curb Apple's dependence on the iPhone anytime soon.
Plans for the future are also murky. The Vision Pro has gotten off to a sluggish start, partly due to its high price tag and lack of popular apps, and Apple recently scrapped its electric vehicle plans. It plans to roll out new generative AI features for its devices and apps, but that could be more a defensive move against its big tech rivals than an offensive one.
Apple expects its revenue to rise by the "low single digits" in the third quarter, while analysts expect its revenue and earnings to grow 1% and 7%, respectively, for the full year. For fiscal 2025, they expect 7% revenue growth and 9% earnings growth. Those growth rates are steady, but they're arguably not high enough for a stock which trades at 27 times forward earnings. Its low yield also won't attract any serious income investors.
Where will Apple's stock be in a year?
Apple will likely remain an attractive safe haven stock as long as interest rates stay elevated. But if interest rates decline, investors could pivot away from Apple's maturing business and buy higher-growth stocks instead. Therefore, Apple's stock might head higher over the next 12 months -- but it could struggle to outperform the S&P 500 and many of its peers.
