Apple’s Q1 Numbers Should Be Fine — But the Stock Is Still Not a Buy, Warns Goldman Sachs

Less than 24 hours from now — Thursday, after close of trading — tech giant Apple (AAPL) will report its earnings for fiscal Q1 2022.

Many analysts on Wall Street are optimistic, predicting Apple will report year-over-year sales growth of 6.5%, and 12.5% better earnings that it reported a year ago. For its part, Goldman Sachs thinks those analysts are probably right about the earnings growth — and maybe even a bit conservative.

But Goldman Sachs’ Rod Hall still doesn’t think you should buy Apple stock.

The explained why, in his view, Apple stock deserves no more than a “neutral” stock rating and a $142 price target, which implies ~11% downside from current levels. (To watch Hall’s track record, click here)

Basically, Hall’s concerns center on just two main things: iPhones, and services.

As regards iPhones, Hall is “expecting positive results” from Thursday’s report, and even sees the potential for “upside risk.” (Hint: in analyst-speak, “upside risk” is a good thing, and refers to the chance that a prediction is overly conservative). “We believe Apple executed better than plan against supply constraints,” confides the analyst, and that “iPhone and wider product demand was likely solid in FQ1.”

That being said, Hall notes that “December data out of China” suggests as much as an 18% decline in iPhone unit sales in that month, for that market. Additionally, he points out that consumer spending in the U.S. declined 3.1% year-over-year in December, which could also imply some sales weakness for Apple in the final month of the quarter.

Finally, Apple’s fiscal first quarter ended on Dec. 25 in 2021, and Hall notes that this may have pushed “typically high post-Christmas demand into FQ2.” That’s not a huge concern, though. While it would mean that iPhone lost a few sales in this report, those sales would reappear in Q2, potentially giving Apple a reason to offer strong guidance on the coming quarter.

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Of greater concern to Hall is the health of Apple’s services business. As the analyst explains, in 2021 Apple enjoyed “elevated” services revenue growth of 27% in comparison to 2020. This was above trend for Apple, which had recently been growing services revenue closer to 16% annually. Hall is forecasting a return to that trend in Q1 2022 — i.e. 16% services revenue growth. Worse, the analyst is warning investors to expect services revenue growth to continue slowing as the year goes on.

In total, Hall sees services revenue growing only 8% for fiscal 2022.

So what does this mean in dollars and cents? For fiscal Q1 2022, Hall anticipates that Apple will report revenues of $118.7 billion, and earn 42% gross profit margins and 31.5% earnings before interest and taxes (EBIT) margins on those revenues. Earnings per share should be $1.91.

For fiscal Q2 2022, Hall predicts Apple’s revenues will slip to $84.9 billion, with deteriorating gross and EBIT margins of 41.1% and 26.4%, respectively. Earnings per share should be only $1.16.

In the analyst’s opinion, these numbers aren’t bad, but they’re not quite good enough to justify a “buy” rating for Apple.

Overall, Feinseth’s view is not one shared by most of his colleagues. 3 additional Holds and 1 Sell are countered by 22 Buys, all coalescing into a Strong Buy consensus rating. The Street projects ~14% upside potential, as indicated by the $181.40 average price target. (See Apple stock forecast on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.