Apple (NASDAQ:AAPL) is set to release its Q4 results on November 2, which makes this an ideal time to review some of the key figures investors ought to look out for. The $2.8 trillion technology behemoth released the iPhone 15 just days before its quarter-end, adding complexity to revenue predictions. Further, with Apple shares dipping in August, monitoring the course of share repurchases will provide valuable insights into the stock’s valuation. For the time being, I am neutral on the stock.
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Can Strong iPhone Sales Momentum from Q3 Transfer Over to Q4?
Apple ended Q3 with strong momentum, which has likely lasted as the company made its way into Q4. For context, Apple posted revenues of $81.8 billion in the previous quarter. While this marked a decline of 1.4% over Q3 2022, lower sales were only due to seasonality around device purchasing and foreign exchange headwinds. In fact, the company posted record iPhone revenues in multiple emerging market regions and in some of its more mature markets, ending the quarter with strong momentum.
Specifically, despite the 2.5% decline in iPhone sales, management mentioned that quarterly iPhone revenues hit new records in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey, and the UAE. The company also set new quarterly records in a number of its more mature countries as well, including France, the Netherlands, and Austria.
Given the strong international iPhone sales momentum Apple posted in Q3, investors are eager to see how the device’s sales will come in during Q4 (Apple’s fiscal Q4 ends September 30th). This question becomes even more interesting when we take into account that Apple released the iPhone 15 on September 22, just before the end of Q4. Well, it’s safe to say that iPhone sales won’t be disappointing. Early reports indicate record-breaking sales in key markets such as China.
However, I would say that regardless of whether iPhone 15 sales appear strong or not, there are better key performance indicators (KPIs) for investors to focus on in this report. The reason is that the iPhone 15’s incremental improvements from its predecessor, while meaningful to the device’s evolution, don’t make a big enough impact to cause users to upgrade. If you own an iPhone 14, there is little incentive to upgrade unless you are a professional creator seeking to leverage an even better camera.
In my view, to assess whether Apple’s momentum remains strong in Q4, investors should assess how Apple’s overall ecosystem is evolving. The company’s installed base is a great metric. For example, even if not many people were to upgrade to an iPhone 15, the fact that the company’s installed base continues to grow is way more important.
Smartphone sales follow a cyclical pattern, with users who opt not to upgrade to the iPhone 15 likely considering the move next year. Conversely, those who have upgraded now may not revisit the decision until the release of the iPhone 17. However, for Apple, the crucial metric lies in sustaining consistent growth in the overall number of iPhone users. Notably, in Q3, Apple celebrated an all-time high installed base of active devices.
In turn, this translates to higher revenues in the company’s non-cyclical source of revenue — Services. Indeed, in Q3, Services revenues grew by 8.2% to $21.2 billion, a new all-time high for Apple. This is a high-margin segment for the company, whose continuous growth should support earnings expansion. So, to wrap up, investors should focus more on the progress in Apple’s installed base and growth in Services rather than the year-over-year growth in iPhone sales.
What Do Apple’s Buybacks Say About the Stock’s Valuation?
Apple’s Q4 buybacks can unveil crucial insights into the current valuation of the stock. Despite a significant uptick in interest rates, the stock’s valuation has consistently maintained elevated levels. Notably, Apple’s forward P/E multiple, standing at nearly 28, surpasses its historical range of 10-17 observed between 2010 and 2020. This discrepancy is particularly perplexing, given the considerably lower interest rates prevailing in that earlier period. That’s quite puzzling and has raised concerns among investors.
Therefore, seeing how Apple will react to its current valuation based on whether it chooses to repurchase a bunch of stock or be more conservative should be a good indicator. If AAPL continues buying back stock aggressively, it’s quite likely that the company’s own earnings growth expectations for the future remain assertive. If, instead, repurchase activity softens, it could be an indicator that management thinks the stock is overvalued relative to the company’s earnings growth potential.
Is AAPL Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Apple features a Moderate Buy consensus rating based on 20 Buys and nine Holds assigned in the past three months. At $207.69, the average Apple stock forecast implies 16.1% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell AAPL stock, the most accurate analyst covering the stock (on a one-year timeframe) is Krish Sankar from TD Cowen, boasting an average return of 47.5% per rating and a 93% success rate.
The Takeaway
In conclusion, as Apple gears up for its Q4 results, the focus should extend beyond the immediate impact of iPhone 15 sales. While early reports suggest strong demand, the key indicators for investors lie in the sustained growth of Apple’s installed base and the flourishing Services segment.
Additionally, an assessment of Apple’s buyback strategy in Q4 will offer insights into the company’s valuation and management’s confidence in future earnings growth. As of now, maintaining a neutral stance on the stock seems prudent.
