Apple reported strong earnings on Monday afternoon, helping the stock to rise modestly after hours and causing some analysts to raise their price targets for the company. To profit in a highly efficient market, investors need to do more than read the headline and agree that a company had a good or bad quarter. We need to go deeper to understand what it means.
First, the numbers:
- Revenues rose 12.4% yoy to $42.12 billion
- EPS rose to $1.42
- Next quarter’s revenue expected between $63.5 and $66.5 billion
- Gross margins rose 100 basis points yoy to 38%, guiding for similar figure next quarter.
- iPhone revenues rose 21% yoy, iPads down 14% yoy, Macs up 18% yoy
- iPhone ASP rose to $603 from $561 in the previous quarter
- $17 billion spent on buybacks last quarter; $155b in cash/investments remain on hand
Analyzing Growth
The first and easiest part of the company is revenue growth. AAPL went from 6% year-over-year growth last quarter, a slight miss, to over 12% year-over-year growth this quarter. Acceleration was to be expected with new products and a positive reception from the public for the iPhone 6 and 6 Plus.
Growth in Mac sales was also expected, but the rate of growth is much stronger than some had projected. The demand for computers in the back-to-school season always boosts sales in this quarter, but Macs are in a shrinking market. Laptop sales remain down according to most analyst experts, and desktops are even weaker. If Mac sales are growing as the market shrinks, Apple is growing its market share. This is a very positive indicator for the company that it can grow even beyond the market for smartphones.
iPads were a weak spot, with sales declining on a year-over-year basis, which some will cite as a cause of concern. However, analysts expected iPad sales to fall because the replacement cycle is longer for these devices than for phones. That fact, combined with the fact that iPad mini sales were very strong throughout 2013 due to pent-up demand and undersupply in late 2012, made for tougher comps this year. Some headline hungry journalists are asking if this is the end of the iPad, but analysts had actually expected worse sales than we got. Awkward timing for the device means this contraction is not much of a concern.
Analyzing Margins and Costs
Apple is a mature company at this point, so margins are a greater concern than revenue growth, which is expected to be maturing. Apple’s stock has suffered significantly in the past when margins have contracted, because the fear of ruthless competition and constrained consumer spending has kept some analysts worrying that the Apple premium cannot last.
This quarter, a combination of buybacks, a mix shift towards higher margin devices (iPhones earn Apple more than iPads), and a mix towards more expensive units (average selling prices rose for iPhones; Macs are more expensive than iPads) also helped on this front.
The differences are tiny—38% over 37% a year ago, and guidance for 37.5% to 38.5% next year—but they are significant. Apple does not want to face the downward spiral towards commoditization that hit Dell, HP, and other legacy PC makers, or that the company thrust on Microsoft with its greater compatibility with Windows in the last decade. Android and Samsung are a significant threat to Apple’s margins on this front, which is why this is an important point for investors. So far, Apple is guarding its castle well.
Another way to help margins is to keep costs down, but Apple has not done well on that front. Total operating expenses rose 26% to $4.8 billion in the quarter on a year-over-year basis. However, this may be a false alarm, since R&D accounted for the bulk of the increase—those expenses rose 44% to $1.6b, accounting for roughly half of the total rise despite being a third of total operating expenses.
Total current assets fell slightly to $68 billion while cash equivalents fell to $13.8 billion, while inventories, deferred tax assets, and other current assets rose. Short-term marketable securities more than halved, while property rose by a quarter. Current liabilities rose by 47%, and long-term debt rose by about 75%. This increase in debt was not dilutive to common stockholders’ equity, which rose from $19.8b to $23.3b. The company’s fiscal engineering remains powerful, and good for shareholders.
Conclusions
AAPL rose over 2% in early morning trading Tuesday morning for a number of reasons. Strong top-line growth, an improvement in margins, a strong share buyback program that returns value to shareholders, non-dilutive growth in debts, a mix-shift that rose margins, and sales above expectations across the board that, in the case of Macs, bucked the broader market trend, are all reasons to be bullish on the stock.
This doesn’t mean you should run out and buy the stock—all of this good news is already priced in. The question is whether, going forward, the company can provide even further upside or if this is a peak. Bulls and bears will debate this question, creating a market and volatility that will make AAPL rise and fall as the broader economy moves on.