Apple (AAPL 1.97%) started 2023 on a sorry note. Shares of the tech giant slipped to their 52-week lows on Jan. 3, driven by concerns that a shortfall in iPhone production due to lockdowns in China will affect the company's results for the December 2022 quarter.
Apple stock is now 27% off its 52-week high. However, the stock has a one-year median price target of $175, according to a consensus estimate of 39 analysts, which points toward a 34% upside from current levels. So, should investors buy Apple stock near its 52-week low based on analysts' projections? Or should they sell the stock in the anticipation that things could get worse? Let's find out.
The red flag for Apple stock
Analysts are worried that the company's quarterly performance for the three months ending in December 2022 may fall below expectations. This may not be surprising, given that iPhone production estimates for the holiday quarter have been dwindling. JPMorgan, for instance, expects Apple to manufacture 75.5 million iPhones in its fiscal first quarter (which ended last month), which is ideally its strongest quarter. That would be roughly 12% lower than the prior-year period's estimated production of 85.5 million iPhones.
Since the iPhone is Apple's biggest product line and produced 52% of its revenue in fiscal 2022, the segment's weakness is likely to weigh heavily on the company's financial performance. Analysts anticipate Apple's revenue to decline 1% year over year in the first quarter of fiscal 2023 to $122.6 billion. Its earnings are expected to shrink to $1.97 per share, compared to $2.10 per share in the prior-year period.
Meanwhile, analysts anticipate Apple's fiscal 2023 revenue to increase just 2.6% to $404 billion, while earnings could grow at a slower pace to $6.20 per share from $6.11 per share in fiscal 2022 (which ended on Sept. 24, 2022). For comparison, Apple's revenue increased 8% over the prior year in fiscal 2022, while earnings were up 9%.
So, the new fiscal year could turn out to be more challenging for the company. That's not surprising, as a recovery in the smartphone market isn't expected until the second half of 2023. Market research firm IDC has slashed its 2023 smartphone shipment forecasts by 70 million units already. The firm expects overall 2023 shipments to increase by 2.8% following a 6.5% decline in 2022.
The softness in the smartphone market, along with the production constraints that Apple faces in China, don't paint a good picture of its iPhone business in the near term. That could send the stock lower.
The green flag investors shouldn't miss
The iPhone, no doubt, plays a key role in determining Apple's fortunes given the product's massive influence over the company's top line, but the services business could help it mitigate the smartphone weakness to some extent in 2023.
That's because the services business is growing impressively on account of Apple's huge installed base of devices. Services revenue was up 14% year over year in fiscal 2022 to $78 billion, outpacing the company's overall revenue growth. The segment accounted for nearly a fifth of the tech giant's revenue last quarter, but its gross margin of 70.5% was well ahead of the 34.6% gross margin of the product business that produced the rest of the company's revenue.
A potential increase in iPhone sales in 2023, along with the addition of new products, such as a rumored mixed-reality headset and a foldable smartphone, could help Apple further expand its already impressive installed base of devices that stood at an estimated 1.8 billion at the beginning of 2022. As a result, Apple's services revenue could keep heading higher, and the segment's fat margin profile should rub off positively on the company's bottom line.
Meanwhile, an improvement in 5G smartphone sales could be another reason why Apple may be able to deliver stronger-than-expected iPhone growth. An estimated 611 million 5G smartphones were sold in 2022, up nearly 15% from the prior year. In 2023, 5G smartphone sales are expected to grow at a faster pace of over 20%.
As Apple is the dominant player in the 5G smartphone space, with a market share of nearly 30%, the faster growth in sales of 5G smartphones could help the company spring a positive surprise.
What should investors do?
While a tepid smartphone market and Apple's reliance on China for 80% of its production capacity are going to be potential headwinds for the stock in 2023, some pockets of positivity could help the company overcome these challenges. Apple's solid position in 5G phones, the growing services business, its rumored product pipeline, its focus on emerging markets, and the company's efforts to move more production out of China are tailwinds that investors should take note of.
The stock's sell-off in the past year has made it cheap. Apple is trading at 21 times trailing earnings, which represents a discount to its five-year average price-to-earnings ratio of 24. Buying this tech stock at its current valuation may turn out to be a smart move in the long run, especially considering that the company is sitting on some notable catalysts that could power its growth for a long time to come.
