In 2022, Apple continued its impressive growth trajectory, delivering another record-breaking year in revenue and earnings per share. The company's flagship product, the iPhone, remained a key driver of growth, while other segments such as Mac, Wearables, and Services also saw impressive gains. Looking ahead to 2023, Apple is expected to continue its momentum and launch new products and services that will expand its ecosystem and customer base.
This blog is written before Apple's earning on Thursday, May 4, 2023 in hope to offer some insight about Apple operation in 2022, and investors can make informed decision. We will explore Apple's performance in 2022, key drivers of growth, and predictions for what to expect in 2023, including the highly anticipated Apple VR headset and Apple Car. Furthermore, we will also predict what Apple might do on earning days, for instance more aggressive shares buyback. With its strong brand reputation and focus on innovation and sustainability, Apple is well-positioned to maintain its leadership position in the years to come. This blog is produced with python to obtain data, Tableau for data visualization and ChatGPT for grammar correction.
Picture: Apple company. Source: Unsplash
Apple performance in 2022
The three charts below reveal some interesting aspects of Apple's financial performance and strategy. First, Apple is investing heavily in research and development, potentially in the field of AR/VR technology. Second, Apple's net income surged in the fourth quarter of 2020, thanks to the strong demand for its flagship products, the iPhone and the MacBook Air. Third, Apple has a high gross profit margin and a low operating expense growth rate, indicating its pricing power and operational efficiency.
Chart 1 - Cashflow Activities, Asset, Debt, and R&D
The first chart in the report provides an overview of Apple’s cash flow activities, asset, debt, and research and development (R&D) expenditures over the past four quarters. Cash flow activities measure the amount of cash that the company generates and spends from its operating, investing, and financing activities. Asset and debt represent the value of the company’s resources and liabilities, respectively. R&D expenditures reflect the amount of money that the company invests in developing new products and technologies.
The chart reveals several interesting trends and patterns. First, it shows that Apple has been consistently generating positive cash flow from its operating activities, which means that the company is able to generate enough cash from its core business to cover its expenses and invest in its growth. Second, it shows that Apple has been reducing its debt level over time, which means that the company is paying off its obligations and improving its financial health. This is beneficial for shareholders and the company as 2022 saw the one of the fastest rate hikes by FED and it is not expected to come down before 2024. Third, it shows that Apple has been increasing its asset value over time, which means that the company is acquiring more resources and expanding its capacity. Fourth, it shows that Apple has been spending a large and growing amount of money on R&D, which means that the company is committed to innovation and investing in future growth opportunities.
The main conclusion that can be drawn from the first chart is that Apple is a dominant player in the technology industry with a strong competitive advantage. The company has been able to generate positive cash flow from its core business, pay off its debt, increase its asset value, and invest heavily in R&D. This helps positioning the company against difficult time in 2023. The company has also been pursuing new growth opportunities such as VR and in-house production, which could further enhance its market position and profitability.
Furthermore, the Current Ratio (Current Asset over Current Liabilities) seems to be stable throughout the year. The ratio is close to 1, which reflect Apple's liquidity is intact in current economy. However, this might prove to be problematic in difficult time, which can be one of the reason for the move to pay down debt quickly from the management team.
Chart 2 - Net Income and Cash Position
The second chart in the report provides a clear picture of Apple’s financial performance over the past four quarters. It displays two key indicators: net income and cash position. Net income measures the amount of profit that the company generates after paying all its expenses, while cash position reflects the amount of liquid assets that the company has on hand.
One of the most striking features of the chart is the sharp increase in net income in Q4 2022. This can be attributed to the successful launch of two new products: the iPhone 14 and the MacBook Air. These products have been widely praised by critics and consumers alike for their innovative design, functionality, and performance. They have also become Apple’s main sources of revenue, accounting for more than half of the company’s total sales.
The chart also shows that Apple has been steadily growing its cash position over the past year. This indicates that the company is not only generating profits, but also managing its cash flow efficiently. The company has been paying off its debt obligations, reducing its interest expenses and improving its credit rating. At the same time, it has been accumulating cash reserves, giving it the flexibility and security to pursue future growth opportunities.
The second chart supports the main conclusion from the first chart, which is that Apple is a dominant player in the technology industry with a strong competitive advantage. The company has been able to leverage its brand reputation, loyal customer base, and innovative products to achieve impressive financial results. The company has also been investing in its future by building up its cash position, enabling it to fund its research and development initiatives and explore new markets and segments. However, it also has to be noted that there seems to be an aggressive move to lowering debt over funding R&D.
The Return on Asset (ROA) is obtained by dividing Net Income over Total Asset. From the last report, the ROA of Apple by December of 2022 is 34.31%, which is in the 2nd percentile of the industry. This reiterates the world class efficiency of Apple.
Chart 3 - Gross Profit, Operating Expense, Cost of Revenue, and Stock-Based Compensation
The third chart in the report compares the growth rates of four key financial metrics: gross profit, operating expense, cost of revenue, and stock-based compensation. These metrics reflect the profitability, efficiency, and compensation strategy of the company. The chart shows the rate of change of each metric from Q1 2022 to Q4 2022.
One of the most notable observations from the chart is that the growth rate of gross profit is much higher than the growth rate of operating expense. Gross profit is the difference between revenue and cost of revenue, while operating expense is the sum of all the costs associated with running the business, such as research and development, sales and marketing, and general and administrative expenses. A higher growth rate of gross profit than operating expense means that the company is able to generate more revenue per unit of cost, which indicates strong pricing power and operating efficiency.
Another interesting observation from the chart is that the growth rate of cost of revenue is equal to the growth rate of revenue, while the growth rate of stock-based compensation is equal to the growth rate of gross profit. Cost of revenue is the direct cost of producing and delivering the products and services that the company sells, such as materials, labour, and shipping. Stock-based compensation is a form of non-cash compensation that grants employees the right to buy or receive shares of the company’s stock at a predetermined price or for free. A equal growth rate of cost of revenue and revenue means that the company’s cost structure is stable and predictable, while a equal growth rate of stock-based compensation and gross profit means that the company’s compensation strategy is aligned with its profitability goals.
Looking forward 2023
Looking ahead to 2023, Apple is expected to continue its growth momentum and launch new products and services that will expand its ecosystem and customer base. One of the most anticipated products is the Apple VR headset, which is rumored to debut in the first half of 2023. The headset is said to offer a high-end immersive experience for gaming, entertainment, and education. The headset could also pave the way for Apple's future AR glasses, which are expected to be released in 2025. This product is expected to be a high-end headset that can run hundreds of thousands of iPad apps and offer immersive experiences for gaming, fitness, entertainment and more. The development of such a product would require significant investment and research, which could explain the increased focus on R&D in the chart.
Picture: VR headset. Source: Wix
Another factor that could contribute to the high R&D spending is Apple’s decision to move more of its production in-house and outside of China. Over the past few years, Apple has been cutting ties with some of its old manufacturing partners and developing its own chips and components for its products. This strategy could give Apple more control over its supply chain, quality, and performance, but it also requires more resources and expertise. By moving more of its production in-house, Apple could also differentiate itself from its competitors and create a competitive advantage. Recently, Apple announced new factories in India and Vietnam.
Another potential product launch in 2023 is the Apple Car, which has been in development for several years. The Apple Car is expected to be a fully electric and autonomous vehicle that will leverage Apple's expertise in software, hardware, and design. The Apple Car could disrupt the automotive industry and create a new revenue stream for Apple. However, it is not expected to be introduced in the coming months.
In addition to new products, Apple is also likely to improve its existing products and services in 2023. For example, the company could finally introduce a new iPhone significant upgrade with a foldable screen or a notchless design. The company could also launch a new Mac model with an upgraded M2 chip or a redesigned iMac with a larger display. The company could also enhance its services portfolio with new offerings such as Apple Fitness+, Apple Podcasts+, or Apple Music HiFi.
Finally, with the trend of cash allocation, under a turbulence economic situation so far, it is highly possible Apple will issue higher dividend or more aggressive share buyback in an attempt to float the stock price around or higher even if the fundamental sales weaken. This lever is only unique to Apple among the FAANG in 2023 as the company's stock is considered as "safe-haven" where investors seek shelter when facing difficult time. Microsoft and Google is caught up in an AI battle while Facebook and Netflix have their own growth story issue.
*Disclaimer: this is not financial advice, this prediction is purely based on the writer assumption and thinking. Please do your own number before making decision.
Recession Still Missing
Based on these projections, Apple's revenue could be reasonably expected to grow by 5% to $411 billion and its earnings per share (EPS) could increase by 12% to $6.84 in 2023, given no recession. These estimates are based on the assumptions that Apple will maintain its market share and pricing power in its core segments in an uncertain banking stability environment, that it will successfully launch new products and services that will generate incremental revenue and profit, and that it will not face any major disruptions or challenges from competitors or regulators.
Recession Finally Hits
Economists have been predicting a recession ever since July 2022, when the yield curve inverted. The yield curve is a graph that shows the relationship between interest rates and bond maturity dates. An inverted yield curve means that short-term interest rates are higher than long-term interest rates, which signals a lack of confidence in the future economic outlook. The recession is expected to hit sometime between Q1 2023 and Q3 2023, according to various forecasts.
Apple’s strong pricing power and operating efficiency could help it withstand a recession better than its competitors. The company has a loyal customer base that values its products for their quality, design, and functionality. The company also has a lean and agile operation that allows it to adapt quickly to changing market conditions and customer preferences. Moreover, Apple’s investment in retaining and incentivizing its top talent could give it an edge in innovation and customer service. These factors could enable Apple to maintain or even increase its market share and profitability during a recession. However, as mentioned above, the low current ratio of Apple might hinder this chance.
Thus, factoring in all of the above, if recession finally hits this year, the revenue growth rate of Apple might be stagnated for the full year, and EPS might also stay intact, mainly due to economic uncertainty.
Conclusion
Apple is one of the most valuable and influential companies in the world, with a loyal customer base and a strong brand reputation. In fact, given the uncertainty of 2023, Apple are still expected to meet expectation on Thursday. The company history has proven its ability to innovate and adapt to changing market conditions and customer preferences. With its diversified product portfolio, robust services ecosystem, and ambitious future plans, Apple is well-positioned to maintain its leadership position and deliver value for its shareholders in 2023 and beyond.
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