One week after Deutsche Bank analyst Sidney Ho urged investors, fearing a “volatile” tech market, to take refuge in Apple (AAPL) stock, Ho’s colleague Rod Hall at Goldman Sachs agreed that Apple’s probably going to come out on top when it reports fiscal Q2 2022 financial results.
Nevertheless, Hall counsels caution even on this stalwart of the tech industry.
Heading into fiscal Q2 2022 this afternoon, analysts in general are forecasting a strong performance from the fruity tech company — $94 billion in sales, a 42.9% gross margin on those sales, and $1.43 per share on the bottom line. Hall actually thinks Apple will edge those numbers out, reporting $95 billion in sales, 43% margins, and $1.45 in per-share earnings. And yet, it’s not fiscal Q2’s earnings that worry Hall.
Instead, it’s the Q3 earnings that worry him.
After Apple gets done reporting all the good news today, you see, Hall predicts that the bombshell will drop, and Apple will guide investors to expect only $82.4 billion in sales for the year’s fiscal third quarter. If he’s right about that, then not only will Apple miss on guidance today (because analysts have been telling investors to expect $86.2 billion in Q3 sales). $82.4 billion in Q3 sales would also make for about a 13% sequential drop in revenues for Apple — and an even bigger drop than it might have been, if Apple’s sales had been no better than analysts predicted for Q2!
Additionally, Hall predicts Apple will guide to a 42.7% gross margin (worse than in Q2, and 10 basis points worse than analyst estimates). And he predicts Apple will guide to net income of only $1.15 per share — much worse than Q2’s performance, and a good $0.09 shy of the Wall Street consensus for Q3.
What has Hall feeling so small (about Apple’s future)?
“Over the past few weeks we have seen a number of data points suggesting a broad-based slowdown in consumer spending,” says the analyst, a fact he ascribes to both rising inflation and “geopolitical tensions in Europe” (a roundabout way of saying “Ukraine”). Now, the good news is that “high-end consumers” haven’t been hit as hard — a fact Ho also alluded to last week. But in Hall’s opinion, it’s only a matter of time before the same factors depressing consumer demand at the low end, sort of trickle up — so to speak — to affect the well-heeled customers that frequent Apple Stores, too.
As the economy weakens, Hall’s of the view that Apple’s recent $340 million run rate in annual revenue per user (ARPU) is likely to retrace towards pre-pandemic levels — closer to $291 — and then embark upon “a slight downward trend” that will see ARPU fall even farther. If he’s right about that, it stands to reason that Apple’s overall revenues will also slow, or even fall, and take profits down with them.
Unless and until Apple refutes this bearish thesis in today’s commentary, Hall is therefore maintaining only a “neutral” rating on Apple stock, and a $161 price target that implies little chance of Apple’s stock price rising this year.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
