What Apple CEO Tim Cook Is Telling Us About Apple Stock

AAPL StockApple Stock Celebrates Fiscal First-Quarter Results

Apple Inc. (NASDAQ:AAPL) announced its first-quarter fiscal year 2017 results Tuesday, and they were far better than what everyone had expected. Apple stock gained six percent Wednesday on surprisingly good results. The company reported the highest revenue ever, at $78.4 billion, and also posted record “iPhone” sales. “Mac” sales are also back on track, together with the upbeat performance of the “Apple Watch.” But it looks like the “iPad” is struggling.

Also, the company gave future guidance on the lower end of expectations, with expected revenue of $51.5 billion to $53.5 billion. Apple expects the gross margin to be between 38% and 39%.

The diluted earnings per share for the quarter were $3.36, a new all-time record. This sent AAPL stock to a high of $128.75 in the last trading session. (Source: “Tim Cook: High iPhone 7 Plus demand helped fuel better-than-expected sales,” CNBC, February 1, 2017.)

Apple CEO Tim Cook may be a relieved man for the time being, and what he said in the conference call with analysts tells us a lot about what the company plans to do next and where is Apple stock headed.

In its conference call with analysts following the quarterly results announcement, Apple Inc. elaborated on the results and also gave a good picture of things to come for the company in the year 2017. Let us go through what Apple CEO Tim Cook had to say about the future direction of the consumer technology company, which would determine the direction of Apple stock.

Apple iPhone 7 and 7 Plus Push AAPL Stock Higher

First, it was all about the iPhone. The record high sales of 78.3 million units this quarter brought life back to AAPL stock. Apple sold impressive numbers of its “iPhone 7 Plus.” Tim Cook said that while the “iPhone 7” was its most popular model, the company saw especially strong demand for the iPhone 7 Plus, Apple’s higher-end model.

The success of the iPhone may be hard to replicate but it brought a huge sigh of relief to the Apple management and especially Tim Cook. And now Apple is promising a sustained trend of year-over-year growth for the iPhone 7.

Tim Cook was emphatic and let the results speak for themselves. Apple Inc. generated the highest quarterly revenue in the company’s history together with all-time unit and revenue records for the iPhone and Apple Watch, record revenues for “Services” and Mac, and all-time revenue records for four out of five geographic segments. The strong performance of the business also produced all-time record earnings per share, which sent Apple stock soaring.  

The following table gives the product summary.

Apple Inc.: Q1 2017 Unaudited Summary Data

(Units in thousands, Revenue in millions)

  Q1 2017 Q4 2016 Q1 2016 Sequential Change Year/Year Change
Product Summary Units Revenue Units Revenue Units Revenue Units Revenue Units Revenue
iPhone 78,290 $54,378 45,513 $28,160 74,779 $51,635 72% 93% 5% 5%
iPad 13,081 $5,533 9,267 $4,255 16,122 $7,084 41% 30% -19% -22%
Mac 5,374 $7,244 4,886 $5,739 5,312 $6,746 10% 26% 1% 7%
Services   $7,172   $6,325   $6,056   13%   18%
Other Products   $4,024   $2,373   $4,351   70%   -8%
Total Apple   $78,351   $46,852   $75,872   67%   3%

The Apple Mac not only returned to growth, but generated its highest quarterly revenue ever. For the Apple Watch, it was the best quarter ever, in both units and revenues, with holiday demand so strong that the company couldn’t make enough. Tim Cook said that the Apple Watch was the best-selling smartwatch in the world and also the most loved, with the highest customer satisfaction in its category by a wide margin. Cook was confident that the Apple Watch has a great future ahead. Though he may sound optimistic, it is a good indicators of things to come for the consumer technology giant and AAPL stock.

Apple Services Steal the Show

But the star of the show, as expected, was Apple Services, which posted the best quarter ever this December with almost $7.2 billion in revenue. Apple Services includes revenue from “Digital Content and Services,” “AppleCare,” “Apple Pay,” licensing and other services. “App Store” customers broke all-time records during the holiday quarter, including $3.0 billion in purchases in December alone. Revenue from the music business grew for the third quarter in a row, and AppleCare and “iPlus” storage services had all-time record results.

Tim Cook said, “Services are becoming a large part of our business, and we expect the revenues to be the size of a Fortune 100 company this year. Our Service offerings are now driving over 150 million paid customer subscriptions. We feel great about this momentum, and our goal is to double the size of our Services business in the next four years.” (Source: “Apple’s Services Business Hits Fortune 100 Level,” The Mac Observer, January 31, 2017.)

Apple Services are likely to gain traction in the future, which is likely to keep Apple stock shining.

Could Apple Stock Ride High on Media Play?

On being asked by Katy Huberty, analyst at Morgan Stanley & Co. LLC, about the possibility of getting access to the $200.0-billion-plus of cash parked overseas, Apple’s chief executive said that the company would wait for further clarity on the tax relief, but is always open to acquisitions.

Apple may also continue spending on original content, but at the moment, Cook said that they would be rolling out some original content for “Apple Music” this year.

The company started the new “Apple TV” a year ago and management is happy with how that platform has developed, with Apple Inc. having bigger plans for it in the coming days. So far, the new launch has not been able to buoy AAPL stock.

Cook said that they were learning a lot about the original content business and thinking about ways they could play with that.

Which brings us to the next question, could Apple propose buying Netflix, Inc. (NASDAQ:NFLX) in 2017?

It is quite likely that Apple Inc. would consider making a few acquisitions in the media space, if it is planning to transform itself more as a services company. It would be better for Apple stock if the smartphone maker focuses on becoming a more prominent player in the media space, given the backdrop of the likely saturation in the iPhone market.

It may be costly, but acquiring Netflix at a premium may be worth it if Apple wants to compete with the likes of HBO or Amazon.com, Inc. (NASDAQ:AMZN) This would take Apple stock to an altogether new level.

Apple Stock May Overcome Greater China Worries

The discussion then shifted to the biggest growth concern for the company—Greater China. Apple’s fiscal first-quarter sales rose in every region except for China, Hong Kong, and Taiwan. The Greater China sales fell 12% to $16.2 billion for the December quarter, as shown in the table below.

Operating Segments Q1 2017 Revenue (in millions) Q1 2016 Revenue (in millions) Year/Year Change
Americas $31,968 $29,325 9%
Europe $18,521 $17,932 3%
Greater China $16,233 $18,373 -12%
Japan $5,766 $4,794 20%
Rest of Asia Pacific $5,863 $5,448 8%
Total Apple $78,351 $75,872 3%

Source: Apple Inc.

China contributes more than 20% to Apple’s revenue. The China market has been a key catalyst in Apple’s growth for several years, but now local companies like Huawei Technologies and OPPO Electronics are selling handsets that are as good as and cheaper than the iPhone. It is difficult to see how growth will return to the competitive smartphone market of China, but Tim Cook is positive that things are looking better in the region. And the “iPhone 8” this year may just change the company’s fortunes in China and buoy Apple stock.  

Tim said that the Greater China revenue was down 12% but about four points of that was currency related, so it’s an eight-point decline in constant currency. The company witnessed a significantly better performance in the People’s Republic of China as compared to the prior three quarters.

Moreover, Cook highlighted that the iPhone 7 was the best-selling smartphone in China during the quarter, according to Kantar. On Singles Day, which is a huge day in China, Apple was the most popular brand on Alibaba. The company set a new record for Services in China. It is true that challenges are there as the currency has devalued six percent year-over-year and Hong Kong remains an extremely difficult market, but Tim Cook likes many things that he has seen there.

Growth in Emerging Markets to Buoy Apple Stock

Towards the end, Cook discussed the future strategy for markets like India, which hold a big potential for Apple. On being asked about the Indian market, Cook said that it was an important market for the company and they would be investing more in the region. Reports had been coming in earlier that the company is in talks with Indian government officials for incentives to build production facilities in the country.  

Although there might be few hiccups on the iPhone front, things are still looking better if investors focus on the other growth catalysts for the company. It does appear that Apple stock cannot be written off, yet.