Apple’s Quarterly Report Beats Earnings Estimates, but Still Faces Challenges

Apple EarningsIt was an interesting week for Apple, Inc. (NASDAQ/AAPL). The company announced exceptional first-quarter earnings results, touting that demand for the “Apple Watch” is exceeding expectations. But the company isn’t in the clear. In the midst of great news, there are some issues the company needs to contend with if it hopes to be the first public company with a $1.0-trillion valuation.

Strong Performance, International Sales Up

Apple released its quarterly financial results for the first quarter ended March 31, 2015 on Monday, April 27. Revenue grew to $58.0 billion, a 27% increase from the same quarter last year. Net profit is at $13.6 billion, 33% higher than last year’s $10.2 billion. Earnings per share grew more than 40% to $2.33. (Source: Apple, April 30, 2015.)

Tim Cook, CEO, credits much of the sales growth to the solid performance of the “iPhone,” “Mac,” and the Apple Store. There has been a higher rate of consumers switching to iPhone compared to previous quarters. International sales are also up, making up 69% of this quarter’s revenue.

Despite slowing down in its growth path, China is still a huge market for Apple products.

Sales in greater China (mainland China, Hong Kong, and Taiwan) surged to $16.8 billion this quarter, a 71% increase year-to-year. For the first time, quarterly iPhone sales in greater China are better than in the U.S.

Apple’s stock has surged as well. Its share price has increased from around $82.00 to more than $125.00 during the past year.

iPad Sales Disappoint Along with Defective Apple Watch

It’s not all smooth sailing for Apple. The “iPad” seems to be having problems in sales figures. The quarterly report shows iPad sales of 12.6 million units, a 23% year-over-year decline. There is tough competition in the tablet market. Even Apple’s own “iPhone 6” and “iPhone 6 Plus” are alternatives to an iPad due to their increased size.

On Wednesday, April 28, The Wall Street Journal reported that one of the key components of Apple Watch is found to be defective. The component, the taptic engine, is designed to produce the sensation of being tapped on the wrist.

The tap engine is one of the central technologies for the Apple watch. It is less intrusive than ringing or buzzing in order to get the user’s attention. As a result of the defect, production slowed down in order to fix the issue. This bump in the road also happened to cause Apple shares to drop 2.7% on Wednesday.

Hoarding Cash and Paying Dividends

It’s no secret that Apple has a lot of cash—$194 billion to be exact. This gives the company a huge advantage. Its competitors, like BlackBerry and Google, do not have nearly as much cash on hand. This makes it easier for Apple to invest in new technologies and acquire companies as part of its growth strategy.

Looking at the price-to-earnings (P/E) ratio, Apple is trading at 16.95, which is well below the industry’s average of 32.46. Google has a P/E ratio of 25.60; Samsung is at 8.91; and BlackBerry does not have a P/E ratio because it’s not making any money.

On the dividend side, Apple pays an annual dividend of 1.5%, or $1.88 per share. The company has increased its dividend three times in less than three years. Due to the growth prospects of the company, investors might be willing to pay a premium.

From a fundamental perspective, Apple looks solid long-term despite its short-term hiccups. Investors should be aware that new technologies might break through and Apple may not be the leader forever.