Is Apple Stock's Risk-Reward Still Attractive After Q3 Earnings, Lighter iPhone Revenues? 'New Chapter Of How Investors View Apple'

Apple, Inc. AAPL’s third-quarter results Thursday failed to impress Wall Street, and the stock promptly reacted with a move to the downside. Here’s what the Street has to say.

The Apple Analysts:

• Bernstein analyst Toni Sacconaghi maintained a Market Perform rating on Apple stock with a $195 price target.
• Credit Suisse analyst Shannon Cross maintained an Outperform rating and $220 price target.
• Needham analyst Laura Martin maintained a Buy rating and $195 price target.
• Rosenblatt Securities analyst Barton Crockett downgraded Apple shares from Buy to Neutral and maintained a $198 price target.
• Raymond James analyst Srini Pajjuri maintained an Outperform rating and raised the price target from $180 to $200.
• UBS analyst Aaron Rakers maintained an Overweight rating with a $225 price target.
• Wedbush analyst Daniel Ives maintained an Outperform rating and lifted the price target from $220 to $230.

Reduce Overweight Positions, Says Bernstein: Apple's full-year revenue guidance of 7% growth appears high, says Bernstein's Sacconaghi, as he sees the iPhone 15 as more evolutionary rather than revolutionary.

The analyst expects the softer uncertain macro and consumer environment to hurt Apple. The company also faces a 53-week comparison, he added.

“We view near-term risk-reward on AAPL as relatively balanced; Investors may want to look reduce overweight positions, beginning in September,” Sacconaghi said. The analyst based on his recommendation on seasonal trading pattern and the stock's stretched valuation.

The third-quarter earnings outperformance was due to lower-than-expected operating expenses and a lower tax rate, the analyst said.

Credit Suisse's 3 Key Takeaways:  Following Services business outperformance, fueled by record performances for four categories and quarterly records for three categories, Credit Suisse's Cross said she sees further acceleration ahead. As the ad market continues its recovery and the company laps tough App Store comps, the business will likely accelerate, thanks to a record installed base of active devices, she said,.

The analyst also pointed to strong gross margin guidance of 44%-45% for the fourth quarter, as the company benefits from favorable commodity costs, a growing mix of Services, scaling up of newer businesses and timing of product releases.

Emerging markets have been a bright spot for Apple for its hardware sales, with particularly strong performance in India, Indonesia, Southeast Asia, Latin America and the Middle East, Cross noted. The analyst does not see a margin hit from the higher mix of emerging market sales, as Apple mainly targets wealthy customers in these countries,

Cross continues to expect 8% revenue growth for the fiscal year 2023.

See Also: Everything You Need To Know About AAPL Stock

Cost Savings Make All The Difference For Apple, Says Needham: Apple's record high gross margin of 44.5% for the June quarter came about due to cost savings and a shift toward Services, analyst Martin said. The analyst also noted that Apple's cost control, slowed hiring and better expense management reined in operating expense growth.

Apple's Tim Cook said on the call the company is researching use cases for generative AI in its products, Martin noted. AI/ML is core fundamental technology integral to every product the company makes, she noted.

US Slowdown To Hurt, Rosenblatt Says: Until a material new product category takes hold, a slowdown in the U.S. is likely to last, Crockett said. “And that is uncertain both in timing and success, leaving little reason to favor shares now trading near peak absolution and relative multiples,” he said.

Services Star Of Show, Wedbush Says: Apple bull Daniel Ives said the quarter qualifies as “good” due to an in-line revenue estimate, and a strong bottom-line beat despite 400-basis-point forex headwinds.

The 8% year-over-year Services revenue growth exceeded expectations and will likely accelerate to double digits in the September quarter and 2024, he said.

“Overall, this remains a golden installed base story as Apple further penetrates its unmatched ecosystem,” Ives said, adding that strong upgrade potential and higher ASPs set up Apple for a  "mini super cycle” despite the murky macro.

Munster Plucks Out Positives: The most important data point from the June quarter was the record installed base of active devices, said Deepwater Asset Management's Gene Munster. He estimates the metric at 2.05 billion, with iPhones accounting for about 1.2 billion of these.

“I believe we are entering a new chapter of how investors view Apple,” the fund manager said. He reiterated his view that over the next five years, investors will see Apple as a “can't live without consumer staples company.”

To sustain 5%-10% revenue growth over the next seven years, Apple needs new big markets and India is key on that count, Munster said. Longer term, the analyst expects India to surpass Greater China, which is estimated to account for about 20% of sales this year.

Munster also said investors are missing the potential of the Vision Pro mixed-reality device.

“I believe spatial computing will join mobile as our central daily computing platforms and by 2030 it will account for more than 10% of Apple's overall business,” he said.

AAPL Price Action: At last check, Apple shares were down 3.19% to $185.06, according to Benzinga Pro data.

Read Next: Apple Celebrates Record-Breaking Quarter In India, Defying Drop In Global iPhone Sales

Photo via Shutterstock.