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Apple Stock: iPhone Sales May Surprise In Fiscal Q1

While iPhone sales and segment profits are likely to be underwhelming in fiscal Q1, the results could still be better than expected. Here is why.
  • This is the third article in our Apple earnings preview series. Today, we talk about the business that is most likely to cause an impact on earnings day: the iPhone.
  • The iPhone’s performance in Q1 is likely to be underwhelming. But investors could be underestimating segment sales in the quarter.
  • The Apple Maven will cover Apple’s  (AAPL) - Get Free Report earnings in real-time, via live blog, starting after the closing bell on February 2.
Figure 1: Apple Stock: iPhone Sales May Surprise In Fiscal Q1

Figure 1: Apple Stock: iPhone Sales May Surprise In Fiscal Q1

(Read more from the Apple Maven: Apple Stock: iPhone Sales May Surprise In Fiscal Q1)

Apple’s iPhone: Yellow Flags

Investors have been warned since October 2022: fiscal Q1 is likely to be a very tough period of sales for Apple, particularly on the iPhone side.

On Q4 earnings day, nearly three months ago, CFO Luca Maestri anticipated that total company sales would suffer nearly ten percentage points of FX pressure. But the worst for Apple, especially in regards to the iPhone (52% of fiscal 2022 sales, see below) was yet to come.

Figure 2: Fiscal 2022 revenues by segment.

Figure 2: Fiscal 2022 revenues by segment.

Only a few days after earnings day, in early November, Apple announced the following:

“COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro and iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity. [...] We now expect lower iPhone 14 Pro and iPhone 14 Pro Max shipments than we previously anticipated.”

The one-two punch caused a slew of Wall Street analysts to reduce their estimates for Apple’s fiscal Q1 results through the end of calendar 2022. It was not too hard to predict that, on the heels of increasing bearishness, Apple stock would have a tough December.

Notice below how Apple stock (blue line) underperformed the S&P 500 and the Nasdaq indices by a good bit during the last month of 2022.

Figure 3: AAPL vs. S&P 500 and Nasdaq performance.

Figure 3: AAPL vs. S&P 500 and Nasdaq performance.

iPhone: The Silver Lining

But as the reader probably knows very well, stock price performance is usually not a function of absolute numbers posted by a company, but rather by the delta between actual results reported and prior expectations. This is how the iPhone could be a positive this earnings season.

Make no mistake: I do not expect iPhone sales figures to be strong. But a recent report issued by research company Canalys suggests that analysts and investors may be underestimating Apple’s ability to beat consensus on iPhone sales.

Canalys reported that global smartphone shipments dropped by 17% in the holiday quarter. This is bad news for Apple and its peers, at face value. However, Apple gained market share YOY, reaching the mark of 25% – an all-time record for the Cupertino company.

Figure 4: Worldwide smartphone shipment market share, top five denodas, Q1 2020 to Q4 2022.

Figure 4: Worldwide smartphone shipment market share, top five denodas, Q1 2020 to Q4 2022.

Let’s do some quick, back-of-the-envelope calculations:

  • Device shipments dropped from around 360 million in Q4 of 2021 to 300 million in 2022.
  • But Apple’s market share increased from 23% to 25%.
  • 25% times 300 million in 2022 vs. 23% times 360 million in 2021 = 9% YOY drop.

While a decline in units sold is never great news, a single-digit drop may be better than many expect. Evidence can probably be found in the $250 billion in market cap lost since Apple’s fiscal Q4 earnings day – way too much, in my view, to justify the holiday quarter headwinds.

A Couple More Things To Consider

iPhone units shipped, however, do not tell the full story. Since the lost revenues will probably be heavily skewed towards the higher-priced, probably higher margin Pro and Pro Max models, iPhone revenues and segment profits could decline more than the 9% mentioned above.

On the other hand, FX headwinds are likely to be substantially less severe than Apple’s management team originally anticipated.

As mentioned in a recent article, the US dollar peaked right around Apple’s fiscal Q4 earnings day, when the CFO communicated guidance. Since then, the American money has depreciated around 8% relative to a basket of foreign currencies.

Ask Twitter

We have recently asked Twitter, about Apple’s fiscal Q1 earnings report that is scheduled to be released on February 2: “which segment do you think will perform best relative to expectations?” You can still participate and share your opinion.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)