Apple beat quarterly guidance after the close on Thursday, ahead of what is anticipated to be a sturdy upgrade cycle for the iPhone with artificial intelligence in the approaching months. Apple’s revenue for the third fiscal quarter resulted in June rose 5% year-over-year to a record $85.78 billion, beating the LSEG’s estimate of $84.53 billion. Earnings per share rose 11% to $1.40, beating the LSEG’s consensus estimate of $1.35. AAPL YTD Mountain Apple YTD Apple shares fell as much as 2.7% in after-hours trading before clawed their way back into positive territory. The stock closed the regular session down 1.7% in a rough market on Thursday. Bottom Line In addition to strong overall revenue and profits, services revenue hit a brand new high within the third fiscal quarter. Apple again hit a record variety of installed lively devices across all regions and product categories. All of this translated to healthy companywide gross margin, leaving the tech giant well-positioned to unveil its latest AI-enabled iPhone next month. While Greater China remained a weak spot, revenue within the region fell just 6.5% yr over yr, an improvement from the dismal first half. On the earnings call following the earnings release, management said China declined lower than 3% on a relentless currency basis, meaning foreign currency headwinds accounted for greater than half of the quarter’s decline. iPhones were the highest three best-selling models in China’s cities through the quarter, in keeping with a survey by analytics provider Kantar. Apple Why we own it: Apple’s dominant hardware and growing services businesses provide a deep competitive advantage and lots of bundling opportunities. Management’s so-called net money neutral strategy provides confidence that free money flow will proceed to fund dividends and buybacks. Plus, the corporate’s commitment to the client experience has translated into industry-leading user loyalty scores and given it pricing power. There’s a reason it’s one among only two stocks within the portfolio to own, not trade. Last Purchase: April 8, 2014 Launch: December 2, 2013 During the earnings call, CEO Tim Cook spoke at length about Apple Intelligence. The company is clearly excited and optimistic about the probabilities of generative AI and what it means for its ecosystem. He said, “We will continue to make significant investments in this technology and are dedicated to the innovation that will unlock its full potential.” While we all know users will need an iPhone 15 Pro or higher to benefit from the upcoming AI software features, now we have yet to see the iPhone 16 and any hardware upgrades that include it. Apple typically unveils its latest iPhones in September. Since the corporate’s fourth fiscal quarter ends in September, we likely won’t see the complete financial advantages from selling latest devices. That won’t occur until Apple’s first fiscal quarter of 2025, the vacation season that ends in December. However, the expected AI-driven boom in latest iPhone sales represents a transparent positive catalyst within the near term. Therefore, we proceed to imagine investors should patiently “own, don’t trade” shares and use the stock’s weakness as a possibility to construct positions ahead of the upgrade cycle. We reiterate our $240 per share price goal and maintain our 2 rating. Apple shares, down about 8% from their all-time high of over $237 last month, have fared higher recently amid the painful market rotation away from technology stocks. Quarterly Commentary The SG&A position was higher than expected within the quarter. But that is to be expected given the outperformed sales. Companywide profitability was solid with gross margin within the quarter of 46.3%, up 174 basis points or 1.74 percentage points yr over yr and just barely higher than expected. While product gross margin was a bit underwhelming, this miss was greater than offset by extremely strong profitability in services. Research and development expenses were a bit elevated but were greater than offset by lower-than-expected selling, general, and administrative expenses. Given the AI opportunity Apple has ahead of it, we’re greater than joyful to see them spend slightly more on R&D. That’s much more true considering the corporate is a money-printing machine whose operating money flow and free money flow were strong within the quarter, supporting capital returns to shareholders over time. Apple ended its fiscal third quarter with about $153 billion in money, equivalents, and marketable securities on its balance sheet. After subtracting $101 billion in debt, it stays with net money of about $52 billion. Apple’s policy is to be net money neutral over time, meaning that if the money is not used for acquisitions or investing in organic growth, it’ll be returned to shareholders through buybacks and dividends. During the reported quarter, Apple returned over $32 billion to shareholders, including $3.9 billion in dividends and equivalents and one other $26 billion by repurchasing 139 million shares. Products iPhone sales declined barely through the quarter. However, they increased on a relentless currency basis. CFO Luca Maestri said on the conference call that iPhones “set June quarter records in several countries, including the UK, Spain, Poland, Mexico, Indonesia and the Philippines.” The MacBook Air with the M3 chip was the driving factor for laptop results through the quarter. Maestri said that “half of the MacBook Air customers in the quarter” were latest to the device. iPad sales benefited from the launch of the brand new iPad Pro and iPad Air. Maestri said that “half of the customers who purchased iPads in the quarter were new to the product.” The Wearables, Home and Accessories segment saw a year-over-year decline because the Watch and AirPods faced tough comparisons, however the result was higher than expected and suggests sequential acceleration. “Apple Watch continues to attract new customers. Nearly two-thirds of customers who purchased an Apple Watch during the quarter were new to the product, bringing the Apple Watch installed base to a new all-time high,” Maestri said. Services all-time revenue record, with an all-time record in developed markets and a June quarter record in emerging markets. Paid subscriptions rose double-digits to a brand new all-time high, with Maestri saying “both transactional accounts and paid accounts hit a new all-time high.” Apple now has greater than 1 billion paid subscriptions across all services on its platform. That’s greater than double what it had 4 years ago. On the conference call, Cook said, “We achieved revenue records in most services categories, with all-time revenue records in advertising, cloud and payment services.” The record hardware base actually bodes well for services revenue. However, we were also pleased to listen to Maestri say the corporate is seeing “increased customer engagement with our service offerings.” Forecast The September quarter forecast assumes no deterioration within the macroeconomic outlook. Fiscal fourth-quarter revenue is anticipated to grow at an identical rate to the June quarter — which was 5% year-over-year, despite a currency headwind of 1.5 percentage points. That’s consistent with Wall Street’s estimate of 4.3% growth, so you may call it in-line to barely higher than expected. Services is anticipated to grow at a double-digit rate, much like Apple’s fiscal 2024 first quarter. We had 11.3% year-over-year growth this quarter, and Wall Street expects 10.9% for the September quarter. So the forecast here also appears to be in range to barely higher. Gross margin is forecast at 45.5% to 46.5%, higher than the midpoint estimate of 45.7%. Operating expenses are forecast at $14.2 billion to $14.4 billion, higher than the midpoint estimate of $14.56 billion. (Jim Cramer’s Charitable Trust is long AAPL. A full list of stocks will be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after he sends a trade alert before buying or selling a stock in his charitable foundation’s portfolio. 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An individual poses with the unique iPhone and the brand new iPhone 15 outside the Apple Store on Fifth Avenue in New York City ahead of the launch of Apple’s latest iPhone 15 on September 22, 2023.
Alex Rosenfeld |
Apple delivered its best quarterly results after the market closed on Thursday, ahead of what is anticipated to be a sturdy upgrade cycle for the iPhone with artificial intelligence in the approaching months.
