Apple lags Mag 7 rivals in key area analyst say could support earnings

Investors punished Mag 7 peers this week for something Apple hasn't yet given much attention.

Feb 1, 2024 - 08:30

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Apple lags Mag 7 rivals in key area analyst say could support earnings

Apple (AAPL) - Get Free Report shares slumped into negative territory for the year ahead of the tech giant's fiscal-first-quarter earnings, slated for after the close of trading Thursday, amid a rare swirl of bearish sentiment lingering over what was recently the world's most-valuable tech company.

Apple stock, in fact, was the worst performer of the so-called Magnificent 7 set of tech giants last year, although it still managed to rise more than 50%, with a record print of just under $200 a share in mid-December.

The shares have languished since then, however, with concerns about near-term demand for its new iPhone 15, its leadership position in China and its ability to maintain profit margins in its fast-growing services business holding down gains.

Updates from Apple earlier this month indicate that it cut the price of its new iPhone 15 by around $70, or 5%, as part of a Lunar New Year promotion in China amid fading consumer demand and intensifying pressure from rivals, including the state-backed tech giant Huawei Technologies.

Apple CEO Tim Cook has kept the tech giant's AI ambitions relatively quiet as he grapples with potentially big trend changes in iPhone demand,
Alexi Rosenfeld/Getty Images

Reports have also suggested that Beijing has banned the use of iPhones by government employees and state-backed enterprises in order to support the launch of Huawei's new Mate 60 handset.

Taiwan-based Foxconn, a key Apple assembler responsible for around 70% of the tech giant's iPhone shipments, added to that concern earlier this month when it said first-quarter revenue would likely decline from the year-earlier period's levels following what it described as a "flattish" holiday quarter for consumer electronics sales.

Sometimes, it's what you don't have that counts

Interestingly, however, one aspect of its underperformance, its lack of a compelling artificial-intelligence strategy, could be the very thing that supports the stock after it reports results after the market close on Thursday.

Mag 7 rivals Microsoft and Alphabet (GOOGL) - Get Free Report, as well as AI-focused chipmaker Advanced Micro Devices (AMD) - Get Free Report, were all hit hard Wednesday after their better-than-expected December-quarter earnings were offset by AI strategy concerns.

For AMD, it was a case of uneven demand for its new Nvidia-challenging chips, while for Google parent Alphabet it was a lack of a compelling boost to its ad-sales outlook. And for Microsoft, the world's biggest tech company, it was a case of rising capital costs and operating expenses tied to its AI buildout.

Collectively, the three stocks lost more than $110 billion in value over the Wednesday session. That slump followed the post-earnings reaction of carmaker Tesla (TSLA) - Get Free Report, which last week declined to provide a detailed outlook for 2024 profit.

Apple, for its part, is very early on in its AI journey and likely won't have a full and compelling narrative to provide investors until its flagship conference for app developers later in the summer.

CFRA analyst Angelo Zino, who carries a buy rating and a $210 price tag on Apple stock, says AI "has the potential to be Apple’s single biggest catalyst in calendar year 2024." But the technology likely won't have a big near-term impact owing to demand and competition challenges in China and regulatory pressures in Europe.

iPhones sales, as ever, are the key earnings driver

He also sees several other areas that are likely to capture investor attention beyond Apple's AI strategy.

"We forecast further upside to average selling prices in the coming years (e.g., foldable phones), while ongoing growth within the installed base should keep services expansion intact (e.g., advertising, gaming, and bundling)," Zino said.

"We like Apple's attractive pipeline (e.g., spatial computing, Apple car, health care, and the shift toward hardware as a service), while switcher rates remain high," he added.

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iPhone sales, of course, will provide the lion's share of earnings commentary, particularly given that Apple has recorded four consecutive quarters of declining revenue growth.

Analysts estimate iPhone revenue rose around 3.3% from the same period in 2022 to around $68 billion, while services revenue from its App Store, Apple TV and Apple Music offerings advanced about 20% to $23 billion.

Overall revenue likely ticked up 0.65% from year-earlier levels to $117.9 billion, while Apple's bottom line is forecast at $2.10 a share, a near 12% gain.

"The big focus on [Wall Street] naturally will be on iPhone and double-digit growth for services revenue, which [we believe] performed relatively well during the holiday quarter," said Wedbush analyst Dan Ives. The long-time Apple bull carries an outperform rating with a $250 price target on the stock.

"On the conference call the key focus from [CEO Tim Cook] will be around the hot-button China region and what demand looks like in this key region for Apple, which represents roughly 20% of iPhone units," he added.

"While Huawei is clearly a headwind in China and some of the geopolitical swirls, so far iPhone demand has been stable in China with some pockets of relative strength on the high end around upgrade opportunities."

Apple: New foray into spatial computing

Beyond the iPhone and AI, Apple is also banking on its new foray into spatial computing category, with the launch of its $3,500 Vision Pro mixed-reality headset. That sector includes Meta Platforms (META) - Get Free Report.

Ives at Wedbush says Apple could sell as many as 600,000 Vision Pro units this year, with volumes, including lower-priced versions, rising past 1 million in 2025.

"Although we don’t expect the price point of the first-generation Vision Pro to drive much interest from consumers ... we do think Apple will see success in the spatial computing category over time, as new lower price points come to the market, and expect Cook to speak positively about the device on the earnings call," said CFRA's Zino.

Apple shares ended the Wednesday session down 1.94% to close at $184.40 each a move that extends the stock's two-month decline to around 3.6% and values the Cupertino, California-based tech giant around $2.85 trillion.

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