Will Slowing Services Growth Hurt Apple's (AAPL) Q1 Earnings?

Apple’s AAPL first-quarter fiscal 2023 results, to be reported on Feb 2, are expected to reflect the impacts of the sluggishness in the Services business.

The segment, which includes revenues from the App Store, Apple Music, iCloud, Apple Arcade, Apple TV+, Apple News+ and Apple Card, accounted for 21.3% of sales in fourth-quarter fiscal 2022.

Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow.

Apple currently has more than 900 million paid subscribers across its Services portfolio. The App Store has been continuing to draw the attention of prominent developers from around the world, helping the company offer appealing apps to drive the App Store traffic, thereby expanding the subscriber base.

Apple expects Services revenue growth to be negatively impacted by challenging macroeconomic conditions, unfavorable forex, as well as weakness in digital advertising and gaming. Services revenues grew 5% year over year to $19.19 billion in the fiscal fourth quarter.

Apple Inc. Revenue (TTM)

Apple Inc. Revenue (TTM)

Apple Inc. revenue-ttm | Apple Inc. Quote

Click here to know how Apple’s overall fiscal first-quarter results are likely to be.

Apple’s Non-iPhone Portfolio to Boost Revenues

Apple’s non-iPhone portfolio, which comprises Mac, iPad and Wearables, is expected to have aided its top-line growth in the fiscal first quarter.

However, Mac revenues are expected to be negatively impacted by forex. Apple, which has a Zacks Rank #3 (Hold), expects Mac revenues to decline substantially year over year in the to-be-reported quarter. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Per Gartner’s latest report, 65.3 million PCs were shipped in the fourth quarter (December-end) of 2022, down 28.5% from the year-ago period. Lenovo LNVGY, HP HPQ and Dell Technologies DELL witnessed 28.6%, 29.1% and 37% declines, respectively. Apple witnessed a 10.2% decline, much better than HP and Dell’s figures.

Overall, Lenovo remained the top vendor, with a market share of 24%. HP holds the second spot, with a market share of 20.2% in worldwide PC shipments. Dell’s market share was 16.7% in fourth-quarter 2022.

Apple’s market share increased from 8.6% in fourth-quarter 2021 to 10.7% in fourth-quarter 2022.

Apple made the M2-supported MacBook Air available in the fiscal fourth quarter. The 13-inch MacBook Pro was launched in the fiscal third quarter.

In the to-be-reported quarter, Apple expanded its self-service repair program for MacBook Air and MacBook Pro notebooks with the M1 family of chips.

The Zacks Consensus Estimate for Mac revenues for the fiscal first quarter is pegged at $9.74 billion, implying a 10.2% decline from the figure reported in the year-ago quarter.

Apple has also been riding on its strong market share in the wearables space. The company’s endeavor to add healthcare features to its smartwatch has been a game changer for the device, which faces significant competition from the likes of Google, Xiaomi, Samsung Electronics and Huawei Technologies.

The consensus estimate for Wearables, Home and Accessories revenues is pegged at $15.53 billion, indicating 5.6% growth from the figure reported in the year-ago quarter.

Moreover, iPad sales are expected to increase in the to-be-reported quarter. The Zacks Consensus Estimate for the same is pegged at $7.70 billion, suggesting a 6.2% rise from the figure reported in the year-ago quarter.

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