Apple's earnings come with a low bar and high buyback hopes

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

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Its reputation as a haven that can outperform in all market conditions has been discredited this year, as it lags sharply behind peers with better growth, a clearer AI narrative, or a cheaper price — or all of the above. The result is that there may be less room for disappointment as the bar declines, especially with the potential for a massive buyback to be announced.

“Expectations aren't very high this quarter, but if we get a better outlook, along with some reasons to get excited about AI, we could see valuation start to expand a little bit,” said Matt Stuckey, lead portfolio manager at Northwestern Mutual. Wealth management. “It may be difficult to rely on this, but Apple is a high-quality defensive stock, with plenty of shareholder returns and cash flow. Shareholder returns are the dominant reason to take 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 massive buybacks this year. Apple has already spent more than $650 billion buying back its own stock since 2012, according to data compiled by Bloomberg.

The buybacks were a way for Apple to shore up profits. Revenue is expected to decline approximately 5% this quarter, marking its weakest rate in more than a year, as well as Apple's fifth quarter of the past six with negative growth. Overall technology revenue is expected to rise 8.6% this quarter, according to Bloomberg Intelligence.

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

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The stock is down 10% this year, compared with a 3.9% gain for the Nasdaq 100. By a tech-heavy benchmark, Apple's weak performance in the first quarter of 2024 was the steepest in more than a decade. The stock rose 1.9% on Thursday.

Analysts are largely cautious. The consensus on Apple's full-year revenue fell 2.2% over the past quarter, while its net profit fell 0.8%. Less than 60% of analysts tracked by Bloomberg recommend buying the stock, a much lower percentage than for other large technologies.

However, such headwinds could be priced into stocks after the year-to-date decline. Bernstein upgraded the stock earlier this week, calling Chinese weakness “more cyclical than structural” and urging investors to “buy fear.” Likewise, City sees a bottom in sentiment.

Read more: Apple reports to show how it's handling the slowdown: Preview

The stock is barely screened as a bargain, despite trading at close to 25 times estimated earnings. While this is significantly lower than the 2020 peak, it is still above its long-term average, as is the market overall. Moreover, other major companies have comparable or even lower multiples despite their stronger growth trends.

“It's hard to find a case for buying Apple compared to other giant companies,” said Daniel Morgan, senior portfolio manager at Synovus Trust. “It can't support growth, it doesn't have a killer AI strategy, and it's not even cheap.”

The iPhone maker is among the last giants to report, and the group's results have been mostly positive. Shares of Microsoft Corp and Alphabet Inc rose. and Amazon.com Inc., while shares of Meta Platforms Inc. fell. As a result of their varying revenue forecasts and spending plans. Nvidia Corp, the chipmaker most closely associated with artificial intelligence, will report later this month.

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Read more: Apple's OpenAI talks intensify as it seeks to add AI features

A common theme behind the huge uptrend has been demand related to artificial intelligence, an area that Apple has been relatively absent from. However, it is refocusing its Macs on AI, news that prompted the stock's best day in nearly a year last month, and has held talks with both OpenAI and Alphabet about adding some AI features to the iPhone. More details are expected at an event in June.

If the results reveal any additional details about its AI strategy, that could provide additional excitement. Otherwise, a strong capital return strategy could remind investors what they like about Apple amid a backdrop of rising inflation and uncertainty about Fed policy.

“I'm a long-term Apple supporter, and while I'm pessimistic on this in the near term, I'm trying to err on the side of optimism,” Morgan said. “The headwinds appear to be largely priced in and have a huge cash hoard, so buying back the stock and increasing its dividend could reinvigorate interest. However, until it finds a way to reinvigorate growth, I think the stock may remain stuck in the mud.

Technical chart for today

SK Hynix Inc. revealed Its capacity to make high-bandwidth memory chips is almost fully booked over the next year, underscoring the intense demand for semiconductors essential to the development of artificial intelligence. The company aims to outperform Samsung Electronics Co. In providing advanced components, which work in conjunction with Nvidia Corp. accelerators. In creating and hosting artificial intelligence platforms.

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Top technology news

  • Universal Music Group NV, the world's largest record label, said it has entered into a new licensing agreement with TikTok, ending a dispute that led to its artists' songs being pulled from the social media platform.

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

  • Qualcomm, the world's largest seller of smartphone processors, provided optimistic forecasts for sales and profits in the current period, indicating that demand for phones is increasing after a two-year decline.

  • Elon Musk's latest cost-cutting victim: summer interns. Tesla rescinded its offers just weeks before internships were set to begin, prompting aspiring employees to turn to LinkedIn to plead with other employers to take them on.

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

Earnings are due Thursday

  • Before putting it on the market

    • Cyber ​​arc

    • Macom

    • Arrow Electronics

    • Vontier company

    • Corporate Insight

    • ITRON

    • Belden

    • Appian

    • interdigital

    • SolarWinds

    • CoreCard

  • After sales

    • apple

    • Motorola Solutions

    • Expedia

    • Fortnite

    • Cloudflare

    • Godaddy

    • Open the text

    • Dolby Laboratories

    • Global supply

    • Altair Eng

    • Bell Holding Company

    • Workiva

    • Five9

    • Social sprout

    • Silicone movement

    • Viafi

    • Coho

    • Bigbear.ai

    • One Span Company

    • Magnachip Semiconductor

-With assistance from Subrat Patnaik and William Lee.

(Updates for afternoon trading.)

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