Apple strong quarter puts it on sure footing ahead of AI iPhone launch

Apple delivered quarterly beats after Thursday’s closing bell ahead of what’s expected to be a robust artificial intelligence iPhone upgrade cycle in the months the come. Revenue in Apple’s fiscal third quarter, which ended in June, grew 5% year-over-year to a record of $85.78 billion – ahead of the LSEG estimate of $84.53 billion. Earnings per share rose 11% to $1.40 – above the $1.35 LSEG consensus estimate. AAPL YTD mountain Apple YTD Shares of Apple dropped as much as 2.7% in after-hours trading before fighting their way back to positive territory. The stock closed the regular session down 1.7% in Thursday’s rough market. Bottom line In addition to strong overall sales and profit, Services revenue in fiscal Q3 set a new all-time high. Apple once again achieved a record installed base of active devices, across all geographies and product categories. All of that translated into a healthy companywide gross margin, keeping the tech giant on a strong footing as it prepares to unveil its new AI-enabled iPhone next month. While Greater China remained a weak spot, sales in the region were down only 6.5% year-over-year, representing an improvement from the dismal first half of the year. On the post-earnings call, management said China was down less than 3% on a constant currency basis, meaning foreign exchange headwinds accounted for more than half of the quarterly decline. According to a survey from analytics provider Kantar, iPhones were the top three models sold in urban China during the quarter. Apple Why we own it: Apple’s dominant hardware and growing services businesses provide a deep competitive moat and plenty of bundling opportunities. Management’s so-called net cash neutral strategy provides confidence that free cash flow will continue to fund dividends and buybacks. Plus, the company’s commitment to the customer experience has translated to industry-leading user loyalty scores, giving it pricing power. There’s a reason it’s one of only two “own it, don’t trade it” stocks in the portfolio. Most recent buy : April 8, 2014 Initiation : Dec. 2, 2013 During the call, CEO Tim Cook discussed Apple Intelligence at length. The company is clearly excited and optimistic about the opportunity of generative AI and what it means for its ecosystem. He said, “We will continue to make significant investments in this technology and dedicate ourselves to the innovation that will unlock its full potential.” While we know users will need an iPhone 15 Pro or better to leverage the upcoming AI software features, we have yet to see the iPhone 16 and all the hardware upgrades it will bring. Apple typically unveils its new iPhones in September. Since the company’s fiscal fourth quarter ends in September, we likely won’t see the full financial benefits from sales of new devices. That won’t come until Apple’s fiscal 2025 first quarter, the holiday period ending in December. However, the expected AI-driven boom in new iPhone sales does represent a clear positive catalyst on the near-term horizon. So, we continue to believe investors should patiently “own, not trade” shares and use weakness in the stock as an opportunity to build positions ahead of the upgrade cycle. We’re reiterating our $240-per-share price target and maintaining our 2 rating. Apple shares, which are down about 8% from last month’s all-time high above $237, have fared better in the painful market rotation of late away from tech stocks. Quarterly commentary The cost of sales line-item was higher than expected in the quarter. But that’s to be expected given the sales beat. Companywide profitability was solid with gross margin in the quarter of 46.3%, an expansion of 174 basis points, or 1.74 percentage points, from a year ago, and just better than expected. While product gross margin came up a bit short, the miss was more than offset by extremely strong profitability in Services. Research & Development expenses were a bit elevated, but they were more than offset by lower-than-expected Selling, General & Administrative expenses. Given the AI opportunity Apple has in front of it, we’re more than happy to let them spend a bit more on R & D. That’s even more true considering that the company is a cash printing machine, with operating cash flow and free cash flow coming in strong for the quarter and supporting capital returns to shareholders over time. Apple exited fiscal Q3 with roughly $153 billion in cash, equivalents, and marketable securities on the balance sheet. After subtracting $101 billion of debt, we’re left with a net cash position of about $52 billion. Apple has a policy of being net cash neutral over time, meaning that if the cash isn’t used for acquisitions or organic growth investments, it is returned to shareholders through buybacks and dividends. During the reported quarter, Apple gave back over $32 billion to shareholders, including $3.9 billion in dividends and equivalents and another $26 billion via the repurchase of 139 million shares. Products iPhone sales were down slightly in the quarter. However, they were up on a constant currency basis. CFO Luca Maestri said on the call that iPhones “set June quarter records across several countries including the U.K., Spain, Poland, Mexico, Indonesia, and the Philippines.” MacBook Air with the M3 chip drove laptop results during the quarter, with Maestri saying that “half of MacBook Air customers in the quarter” were new to the device. iPad unit sales benefited from the launch of the new iPad Pro and iPad Air, with Maestri saying that “half of the customers who purchased iPads during the quarter were new to the product.” The Wearables, Home, and Accessories segment was down year-over-year as the Watch and AirPods faced difficult comparisons. However, the result was better-than-expected and points to a sequential acceleration. “Apple Watch continues to attract new customers with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch install base to a new all-time high,” Maestri said. Services All-time revenue record, with an all-time record set in developed markets and a June quarter record set in emerging markets. Paid subscriptions grew double digits to a new all-time high, with Maestri saying that “both transacting accounts and paid accounts reached a new all-time high.” Apple now has more than 1 billion paid subscriptions across the services on its platform. That’s more than double the number from just four years ago. On the call, Cook said, “We achieved revenue records in the majority of the Services categories with all-time revenue records in advertising, cloud, and payment Services.” The record installed base of hardware certainly bodes well for Services revenue. However, we were also pleased to hear Maestri say that the company is seeing “increased customer engagement with our Services offerings.” Guidance September quarter guidance assumes no worsening of the macroeconomic outlook. Revenue in fiscal Q4 is expected to increase at a rate similar to what we saw in the June quarter – which was 5% year-over-year despite a currency headwind of 1.5 percentage points. That compares to the Street’s estimate of 4.3% growth. So, call it in line to slightly better than expected. Services are expected to grow at a double-digit rate similar to the rate seen in Apple’s fiscal 2024 first quarter. We got 11.3% year-over-year growth in that quarter, and the Street is looking for 10.9% in the September quarter. So, the guide here also appears to be in line to slightly better. Gross margin is projected to be between 45.5% and 46.5%, better than the 45.7% estimate, at the midpoint. Operating expenses are forecast in a range of $14.2 billion to $14.4 billion, better than the $14.56 billion estimate. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) 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A person poses holding the original iPhone and the new iPhone 15 outside the Fifth Avenue Apple Store in New York City ahead of the launch of Apple’s new iPhone 15, Sept. 22, 2023.

Alexi Rosenfeld | Getty Images

Apple delivered quarterly beats after Thursday’s closing bell ahead of what’s expected to be a robust artificial intelligence iPhone upgrade cycle in the months the come.

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