Apple earnings come with a low bar and high buyback hopes

(Bloomberg) — Apple Inc. is facing something unusual as it prepares to report its second-quarter results after the closing bell: low expectations.

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Its reputation as a haven that can outperform in all market conditions has been refuted this year, as it lags far behind its peers with better growth, a clearer AI narrative, a cheaper price – or all the options above. The result is that there may be less room for disappointment with a lower bar, especially with the likelihood of a massive buyback announcement.

“Expectations are not very high this quarter, but if we get a better outlook, along with some reasons for excitement around AI, we could see the valuation start to expand quite a bit,” said Matt Stucky, chief portfolio manager at Northwestern Mutual. Wealth management. “It may be hard to count on it, but Apple is a high-quality defensive stock with lots of shareholder returns and cash flow. Shareholder returns are the dominant reason for holding a position.”

Analysts expect Apple to add another $90 billion to its buyback program, suggesting it will follow Alphabet Inc. and Meta Platforms Inc. among the big tech names that have announced big buybacks this year. Apple has spent more than $650 billion buying back its own shares since 2012, according to data compiled by Bloomberg.

Buybacks have been a way for Apple to support profits. Revenue is expected to fall nearly 5% this quarter, which would represent the weakest rate in more than a year, as well as the fifth quarter of Apple’s last six with negative growth. Overall technology revenue is expected to increase 8.6% this quarter, according to Bloomberg Intelligence.

The growth trends largely reflect the Greater China region, which accounted for nearly 19% of Apple’s revenue in 2023. The company has seen weak iPhone sales in China as it loses market share to Huawei Technologies Co.

The stock is down 10% this year, compared with a 3.9% gain for the Nasdaq 100 index. Relative to the high-tech benchmark, Apple’s underperformance in the first quarter of 2024 was the steepest in more than a decade . Shares rose 1.9% on Thursday.

Analysts are quite cautious. The consensus for Apple’s annual revenue fell 2.2% last quarter, while the forecast for net profit fell 0.8%. Less than 60% of analysts monitored by Bloomberg recommend buying the shares, a rate much lower than that of other megacapitalization technologies.

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Still, these headwinds may be accounted for in shares after the year-to-date decline. Bernstein upgraded stocks earlier this week, calling China’s weakness “more cyclical than structural” and urging investors to “buy the fear.” Likewise, Citi sees a bottom in sentiment.

Read more: Apple report to show how it’s handling slowdown: preview

The stock is hardly considered a bargain, trading at close to 25 times estimated earnings. While this value is notably below the 2020 peak, it is still above its long-term average, as well as the broader market. Additionally, other megacaps have comparable or even lower multiples despite their stronger growth trends.

“It’s harder to find an argument to buy Apple compared to other megacaps,” said Daniel Morgan, senior portfolio manager at Synovus Trust. “It can’t base growth, it doesn’t have a killer AI strategy, and it’s not even cheap.”

The iPhone maker is among the latest megacaps to report, and the group’s results have been mostly positive. Microsoft Corp, Alphabet Inc. and Amazon.com Inc. gained, while Meta Platforms Inc. fell on a mixed revenue forecast and its spending plans. Nvidia Corp, the chipmaker most closely linked to AI, reports later this month.

Read more: Apple’s OpenAI Talks Intensify as It Looks to Add AI Capabilities

A common theme for the mega-cap advantage has been AI-related demand, an area where Apple is relatively absent. However, it is repurposing its Macs for AI, news that fueled the stock’s best day in nearly a year last month, and is in talks with OpenAI and Alphabet about adding some AI features to the iPhone. More details are expected at an event in June.

If the results provide more details about your AI strategy, it could provide additional excitement. Otherwise, an aggressive capital return strategy could remind investors what they like about Apple, in a scenario marked by high inflation and uncertainty about Fed policy.

“I’m a long-term Apple bull, and while I’m getting pessimistic about the short term, I’m trying to err on the side of optimism,” Morgan said. “The headwinds seem quite priced in and the country has a huge cash hoard, so buying back shares and increasing their dividends could reinvigorate interest. However, until we find a way to truly reignite growth, I think the stock could be stuck in the mud.”

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• Intel Corp. is trying to make a comeback with massive spending on new factories and lots of help from the Biden administration.

• Qualcomm Inc., the world’s biggest seller of smartphone processors, gave an upbeat forecast for sales and profits in the current period, suggesting demand for devices is rising after a two-year slump.

• The latest victims of Elon Musk’s cost-cutting: summer interns. is rescinding offers just weeks before internships begin, prompting would-be employees to take to LinkedIn to appeal to other employers to take them on.

• Huawei Technologies Co., the US blacklisted Chinese telecommunications giant, is secretly funding cutting-edge research at American universities, including Harvard, through an independent Washington-based foundation.

Profits due Thursday

• Pre-market

  • CyberArk

  • Macom

  • Electronic Arrow

  • Vontier Corp.

  • Insight companies

  • Itron

  • Belden

  • appius

  • InterDigital

  • SolarWinds

  • CoreCard

• Aftermarket

  • Litter

  • Motorola Solutions

  • Expedia

  • Fortune

  • cloudflare

  • Go Daddy

  • Open text

  • Dolby Labs

  • Universal Display

  • Altair Eng.

  • Bill Holdings Inc.

  • Workiva

  • Five9

  • Broto Social

  • Silicon Movement

  • Viavi

  • Cohu

  • Big Bear.ai

  • OneSpan Inc.

  • Magnachip Semiconductor

–With assistance from Subrat Patnaik and Yoolim Lee.

(Updates for afternoon trading.)

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