Why I Remain Bullish on Apple Inc.
Apple Inc. (NASDAQ:AAPL) is a stock that people love to hate.
As one of the biggest companies in the world, Apple has expanded into so many different business segments that it’s easy to find imperfections.
It doesn’t help the case for AAPL stock that its price plunged big-time during the last market sell-off. Since October 2018, shares of this tech giant are down more than 25%.
So, when Apple reported earnings earlier this week, it was natural for bears to rush to find fault with it.
And there were quite a few things to criticize. In its fiscal 2019 first quarter (ended December 29, 2018), the Cupertino, California-based company generated $84.3 billion of revenue, representing a five-percent drop year-over-year. (Source: “Apple Reports First Quarter Results,” Apple Inc., January 29, 2019.)
In particular, revenue from the “iPhone” slipped 15% from a year earlier. Since the iPhone is the biggest contributor to the company’s top line, this is not good news.
Now, I should point out that, while I’m a long-time bull on Apple, I don’t think the company is perfect.
Still, before you cross AAPL stock off your watch list, here are three numbers that the bears might have overlooked in Apple’s latest earnings report.
$10.9 billion is a lot of money. In fact, most public companies cannot generate this much in revenue in a year. And yet, Apple managed to earn $10.9 billion in revenue just from services, just in one quarter.
That’s right, “Apple Services” is no longer just an ancillary segment that could be left in the fine print; it is now a full-blown top-line contributor.
Apple Services comprises “Apple Music,” “iTunes,” “iCloud,” “Apple Pay,” “Apple Care,” and more. Together, these services delivered an all-time high revenue of $10.9 billion in the December quarter, up 19% over the same prior-year period.
Offering services may not seem as exciting as launching the next big device, but the business is quite lucrative. For the first time in the company’s history, Apple revealed its gross margin on services—a staggeringly high 62.8%. (Source: “Condensed Consolidated Statements of Operations (Unaudited),” Apple Inc., last accessed January 30, 2019.)
To put this in perspective, the gross margin for the entire company was 38% for the first quarter.
Going forward, Apple Services remains a catalyst for both the top and bottom lines of the company.
Have you ever wondered just how many iPhones are being used around the world?
Many analysts have, but for a long time, they could only rely on estimates because Apple did not reveal that number—until now.
During the company’s latest earnings conference call, Apple’s Chief Financial Officer Luca Maestri said, “Our global active installed base of iPhones continues to grow and has reached an all-time high at the end of December.” (Source: “Apple Inc. (AAPL) CEO Tim Cook on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, January 29, 2019.)
Cook added, “We are disclosing that number now for the first time. And it has surpassed 900 million devices, up year-over-year in each of our five geographic segments and growing almost 75 million in the last 12 months alone.”
900 million units is a lot for one product. If you add the other devices that Apple sells, like its “iPad” and its “Mac” laptops and computers, you’ll see that the company has a total active installed base of 1.4 billion devices.
With a huge and expanding ecosystem of users, Apple is well positioned to further monetize its installed base through software and services.
Apple had a net cash position of $130.0 billion at the end of the first quarter.
That’s a lot of cash! And remember, the company is also generating huge amounts of cash from its operations every quarter.
And yet, management is targeting a neutral net cash position over time.
How is the company going to spend all that cash?
Well, one thing I’m pretty sure Apple will do is repurchase its shares. In the December quarter alone, the company spent $8.2 billion buying back 38 million of its own shares on the open market.
Continued stock buybacks would reduce the number of shares outstanding, allowing each existing shareholder to own a larger portion of the company.
A lower share count would also lead to higher per-share performance metrics, such as earnings per share.
Add it all up and you’ll see that Apple shares remain as appealing as ever.
The company’s smartphone sales might not be as strong as before, but the Apple makes up for it with a fast-growing services segment. Factoring in the company’s huge installed base and enormous cash pile, I’d say the best could be yet to come for AAPL stock investors.