The pandemic and 5G-fueled spending spree is over. Smartphone sales have plummeted compared to where they were in 2021 and early 2022, and companies highly reliant on these device sales are languishing.
After reporting a nearly 11% decline in tech device sales in 2022, tech researcher Gartner expects a further 5% decline in 2023 — most of which is expected to occur in the first half of this year before rallying in the second half.
Apple (NASDAQ: AAPL) had been reporting resilience in its iPhone business up until the most recent quarter, but even the company’s premium mobile phones are getting caught in the scuffle now. Still, Apple stock has rallied over 20% so far in 2023. It remains an ultimate stock to own if the bear market of 2022 continues into 2023. Here’s why.
iPhone was down, but that’s not the whole story
The final quarter of 2022 was brutal for the smartphone market. Just look at Qualcomm (NASDAQ: QCOM), which is a great proxy for the Android phone market (still the global leader, with about 72% market share at the end of 2022). Qualcomm said its smartphone revenue fell 18% year over year in the final months of 2022, and a similar trend will likely continue through this summer.
iPhone did far better than Android, though. During the final months of 2022 (which corresponds to Apple’s first quarter of fiscal 2023), iPhone revenue fell just 8% year over year to $65.8 billion. CEO Tim Cook and company blamed supply chain disruptions that left them with too few iPhone 14 Pros to meet demand. A strong U.S. dollar also negatively impacted overseas sales, so excluding exchange rates, iPhone revenue would have been flat year over year.
Supply is back online, giving the company confidence that the iPhone will rebound. That was the situation with iPad sales this last quarter too (up 30% year over year), which were in short supply but notched healthy growth in fiscal 2023’s first quarter as supply chains loosened up. Don’t expect a similar growth rate for the iPhone, but the iPad’s comeback does illustrate the overall resilience of Apple’s mobile device empire.
Overall revenue fell just 5.6% last quarter, with the temporarily weak iPhone getting a partial offset from iPad and resilient services growth.
Follow Buffett’s lead and hold those Apple shares
Besides the iPhone making a comeback later this year, Apple has some other exciting irons in the fire. It’s widely expected that the long-awaited virtual reality and augmented reality (VR/AR, or simply “mixed reality”) headset will be announced this spring.
That mixed-reality headset could carry a hefty price tag, but what else is new? Apple products have always commanded a premium its fans have been willing to pay up for, so a new mixed-reality offering could be a nice addition to the iOS lineup — and one that additionally fuels more services (software) growth too.
And then there’s Apple’s consistent earnings per share (EPS) performance. Even in a tough quarter with sales and profit margins falling (again, the U.S. dollar’s strength takes a bite out of revenue, and an even bigger one out of profit margins), Apple’s EPS fell just 10.5% year over year. It would have been even worse, except that Apple repurchased nearly $20 billion in stock during Q1 fiscal 2023.
Stock repurchases help boost EPS as it reduces Apple’s overall share count (leaving more profit left over for shareholders). On an annualized basis, those share repurchases equate to 3.3% of Apple’s current market capitalization. It’s a nice cash return in addition to the 0.6% annualized dividend yield. It’s little wonder Warren Buffett keeps about 40% of Berkshire Hathaway‘s stock portfolio in Apple. Even in turbulent times, Apple is a consistent performer.
After the latest update, Apple stock trades for about 26 times trailing-12-month earnings and 26 times free cash flow. It isn’t cheap, but it’s a fair value if you believe the company can continue squeezing a mid- to high-single-digit percentage EPS growth out of its tech device empire for the foreseeable future. With the economy still in a vulnerable state, Apple remains an ultimate bear market stock to hold on to today.
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Nicholas Rossolillo and his clients have positions in Apple, Berkshire Hathaway, and Qualcomm. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and Qualcomm. The Motley Fool recommends Gartner and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.