3 Bullish Takeaways From Apple Inc.’s Earnings Report
It’s been a dicey earnings season for tech companies. Just look at the volatility of companies like Alphabet Inc (NASDAQ:GOOGL). Ahead of the fiscal second-quarter report for Apple Inc. (NASDAQ:AAPL), there was quite a bit of anxiety. Would the iPhone sales hold up? What about China? Would the services business continue its robust strength? Well, for the most part, the Apple earnings were fairly solid and AAPL stock responded.
In the quarter, revenues jumped by 16% to $61.6 billion and earnings came to $2.73 per share. The Street was looking for revenues of $60.9 billion and profits of $2.64. So yes, it was a good beat — and AAPL shares have responded, up about 3.5% to $175, as of this writing. Keep in mind that the revenue growth was the strongest in about two years.
If you’re asking yourself, “should I buy Apple stock?” The answer is “I think so.”
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Here’s a look at my three key takeaways from the Apple earnings report:
Apple Earnings Takeaway No.1: Services
The global smartphone market is reaching saturation levels. During Q2, AAPL sold 52.2 million iPhones, up about 2.9%. Note that Wall Street analysts were looking for 52.3 million.
Yet AAPL has found ways to deal with the situation. First of all, the company has doubled-down on the higher-end market, with the iPhone X that fetches about $1,000 per unit. The result is that AAPL has been able to grow revenues because of higher prices.
Next, the company has been investing aggressively in its services business, which include the iCloud, Apple Music, iTunes and Apple Pay. In the quarter, revenues rose by 31% to $9.2 billion. And it looks like the momentum will continue for some time. For example, there are now 270 million paid subscribers, up from 100 million on a year-over-year basis. In fact, AAPL is projecting that the services segment will hit $50 billion by 2020.
There are some key advantages for this business. The margins tend to be fairly high and the revenues are recurring. No doubt, these are the kinds of things that should help bolster AAPL stock.
Apple Earnings Takeaway No. 2: Strength In China
The past few years in China have been a slog for AAPL. The company has had to deal with intense competition, such as with rivals like Xiaomi, Huawei and Oppo. These companies have not only been able to create quality phones but also to sell them at low price points.
But the latest earnings report for AAPL does show that things are starting to get better. Consider that revenues in Greater China – which includes Hong Kong and Taiwan – increased by 21% to $13 billion.
Interestingly enough, it looks like the main driver is the iPhone X. According to the earnings call, CEO Tim Cook noted that the device was the “most popular” in all of China for the quarter.
Apple Earnings Takeaway No. 3: Massive Financial Resources
Cook is certainly mindful of shareholder value. After all, he announced a $100 billion buyback of AAPL stock as well as a 16% increase in a dividend. So this should represent some ongoing support for the stock price.
Besides, the valuation on APPL stock is reasonable, with the forward price-to-earnings ratio of only about 13X. To put this into perspective, Microsoft Corporation (NASDAQ:MSFT) is at 24X and GOOGLis at 21X.
In other words, AAPL stock looks like a good core tech holding, especially since the company’s growth strategy is showing signs of success.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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