Apple, Inc. (AAPL, Financial) reported impressive fiscal third-quarter results on July 27, exceeding the revenue and earnings expectations of analysts. The company reported earnings per share of $1.30 against analyst expectations of $1 per share. Apple's total revenue was boosted by iPhone sales and services, and all business units of the company reported year-over-year revenue growth, once again highlighting that the company is not too big to grow. Apple achieved a record high in revenue in each geography the company is operating in, which is a good indication of the strong demand for the products and services marketed by the company.
Third-quarter earnings recap and outlook
Revenue for the quarter increased 36.4% to $81.43 billion, up from $59.69 billion the previous year. Apple reported double-digit growth in each of its product categories, with the services and iPhone segments hitting new highs. Apple's services revenue increased 32.9% year-over-year, while iPhone revenue increased 50%. The company's services include App Store platforms, Apple Music, Apple Arcade, Apple News+, Apple TV+, AppleCare, advertising services and cloud services.
Exhibit 1: Revenue by product category
Source: Six Colors
The stellar performance of the iPhone segment was driven by the success of the iPhone 12, which continues to attract buyers in and outside the United States. According to the results of a recent consumer survey conducted by 451 Research, the iPhone 12 customer satisfaction rate stands at 97%, which goes on to suggest that this device is likely to remain in high demand in the foreseeable future.
Commenting on the performance of the latest iPhone devices and the company, CEO Tim Cook said:
“Customers love iPhone 12 for its super-fast 5G speeds, A14 Bionic chip, and Dolby Vision camera never seen before in a phone. Users continue to rely on iPad and Mac to work, learn, create, and connect. iPad had its highest June quarter in nearly a decade, while Mac set an all-time June quarter record. We've seen a great response to the new iMac and iPad Pro, both powered by the M1 chip's exceptional speed and power-efficient performance.”
Services revenue, on the other hand, hit a new high of $17.5 billion, thanks to strong performance from cloud services, music, video, advertising and payment services, as well as the record performance of the App Store and AppleCare products. Apple executives have stressed the importance of becoming a diversified company for a long period of time, and the performance in the last quarter confirms that Apple is on the right track to achieve the desired objectives.
Commenting on the robust performance of the services category, Tim Cook said:
“Turning to services, which set a new all-time revenue record as we continue to roll out innovative new features and programming. We're proud to be the recipients of 35 Emmy nominations this year, which speaks to the quality of our programming and an enthusiastic reception from customers and critics alike.”
Exhibit 2: Revenue growth by region
Source: Six Colors
Apple continues to take impressive steps to stay at the top of the app economy by improving, inventing and introducing new products and features. During the quarter, the company introduced Apple Podcast Subscriptions, allowing users to support their favorite creators, and also launched Spatial Audio for Apple Music, powered by Dolby Atmos, allowing customers to experience multidimensional sound and clarity.
At the time of launching Spatial Audio, vice president of Apple Music Oliver Schusser said:
“Apple Music is making its biggest advancement ever in sound quality. Listening to a song in Dolby Atmos is like magic. The music comes from all around you and sounds incredible. Now we are bringing this truly innovative and immersive experience to our listeners with music from their favorite artists like J Balvin, Gustavo Dudamel, Ariana Grande, Maroon 5, Kacey Musgraves, The Weeknd, and so many more. Subscribers will also be able to listen to their music in the highest audio quality with Lossless Audio. Apple Music as we know it is about to change forever.”
Apple can be expected to generate record revenue in the coming quarters as the company’s offering of 5G-enabled devices will attract many new customers to its ecosystem.
The new MacBook series and iPad Pro come with Apple's own M1 chip, which is another interesting development. Commenting on the strong demand for the new MacBook, chief financial officer Luca Maestri said:
“In enterprise, our customers are excited about the superior performance, battery life, and security that the new M1 Macs bring. MassMutual, for example, is offering M1 MacBook Pro to all of its employees and equipping all conference rooms with M1 Mac minis in preparation for return to work. And with its incredible performance and affordable entry price, the MacBook Air with M1 is gaining rapid adoption among many leading enterprise organizations. Italy Gas, Italy's largest natural gas company, which will soon be using its extensive network to distribute renewable gases, is replacing every employee's Windows laptop with the new MacBook Air, powered by Apple's M1 chip, to bring the latest technology to its workforce.”
The company reported net income of $21.7 billion for the quarter and operating cash flow of $21.1 billion. As a result of the company's strong success in the quarter, Apple decided to return $29 billion to shareholders as well, which confirms that the company is committed to rewarding long-term shareholders with dividends and buybacks.
With its progressive approach to customer privacy protection, which its competitors have yet to attain, the company has emerged as a pioneer in technological design and innovation and is likely to continue expanding its customer base. Apple’s ecosystem has resulted in a sticky customer base as well, which is symbolic of the company’s success. The company is introducing various innovative features to improve the value of this ecosystem, which paints a promising outlook for the company’s future.
Apple is providing customers with access to a variety of complimentary services and software ranging from 4K video editing to keeping track of health data, all without having to sign up for third-party services. This has also been a key ingredient to the company’s success, and Apple remains focused on bringing innovative products and services to existing and new customers to keep this momentum intact.
Commenting on Apple’s business strategy, CEO Tim Cook said:
“Our greatest source of inspiration isn't the technology itself, but how people use it in their own lives, in ways great and small, to write a novel or to read one, to care for an ailing patient or see a doctor virtually, to track their heart rate on a jog, or to train for the Olympics. Every day I'm grateful for the dedication of our teams to the simple mission of creating technology that improves people's lives, and I want to thank everyone at Apple for the purpose and passion they bring to that mission.”
Even on the back of a record-breaking quarter, Apple seems to be well-positioned to deliver even better numbers in the coming quarters, which makes the company a very attractive bet for investors.
Takeaway
Apple reported robust year-over-year growth in each of its product categories and across all the regions for the fiscal third quarter ended in June. Although the company is valued at more than $2 trillion in the market, Apple is trading at a forward price-earnings ratio of 28.31, which is very reasonable for a company that is continuing to grow. Thus, I believe that Apple is still a good pick for value investors.
