The world’s most valuable company has once again succeeded in silencing its critics. Shares of Apple Inc. (AAPL ) surged to record highs last week after the company reported earnings and revenue that were higher than expected.
Apple reported earnings per share of $2.73 on revenue of $61.1 billion during its fiscal second quarter. Wall Street analysts had forecast an EPS of $2.64 on revenue of $60.9 billion.
The company reported its best quarter of sales growth since 2015 as iPhone shipments continued to grow, albeit at a slightly slower pace than expected. Apple sold 52.2 million iPhones during the quarter, up 2.9% from a year earlier. The average iPhone sold for $728 versus analysts’ expectations of $740. For some, this suggests that the flagship iPhone X, which was priced at $999, didn’t perform as well as expected.
Service revenue amounted to $9.2 billion, while the other products segment surged 38% to $3.95 billion. This category includes Apple TV, Apple Watch, AirPods headphones and the Home Pod. Also allaying investor fears was a sharp rise in China revenue, as sales in the world’s second-largest economy rose 21% year-over-year.
For its fiscal third quarter, Apple expects revenue to be $51.5 billion to $53.5 billion. The forward guidance sends a strong signal to investors that they shouldn’t be concerned about a bigger slowdown in iPhone sales.
Wall Street prognosticators rarely like to admit their mistakes, but Apple analysts were quick to concede that their bearish outlook was wrong. Chief among them was Morgan Stanley Analyst Katy Huberty, who issued the following statement in a note to clients:
“Weaker iPhone supplier results suggested meaningful downside in the June quarter which didn’t come to fruition. While forecasted iPhone shipments of 39M units are lower than our 42M estimate a month ago, it’s far better than our 34M estimate which reflected the weaker June quarter outlook from suppliers like TSMC and AMS.”
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Apple: An Emerging Dividend Player
The Cupertino, California-based company is quickly emerging into a solid dividend play, having increased its payout every year since 2013. Apple yields 1.59%, which is higher than the technology sector average of 1.09%. For its fiscal second quarter, Apple increased its dividend by 73 cents a share from 63 cents.
Find the dividend yield of the technology sector on our dedicated page here. You can also get an individual company count and dividend yield of sub-sectors within the technology sector.
Apple also indicated it would spend an additional $100 billion on share repurchases on top of the existing $210 billion buyback program is completed during fiscal Q3. This makes the stock instantly more attractive from the perspective of investors. Solid revenue growth, which is aided by Apple’s now 270 million paid subscribers, is also a positive sign for income investors.
Warren Buffett’s Berkshire Hathaway continues to bet big on Apple. The company bought an additional 75 million shares of the iPhone maker in March, bringing its total holdings to just over 240 million shares. Apple now represents 21% of the company’s public stock holdings. As a result of the purchase, Berkshire now owns nearly 5% of Apple.
Find out why Apple has a bulletproof balance sheet here.
Future Growth
As Apple’s other products category clearly demonstrated, the company has significant growth potential outside its core offerings. By next year, this category is expected to generate $22 billion in sales, which would represent a doubling of 2016 levels.
Though sales of the iPhone X appear to be lagging, Apple continues to generate strong returns on its flagship products. This is expected to continue as penetration into emerging markets intensifies. In particular, China represents a strategic growth avenue for Apple as the world’s second-largest economy becomes the world’s biggest middle class.
That said, strained trade relations between the United States and China could pose a serious risk to Apple’s supply chain. That risk was recently flagged by Morris Chang, founder and outgoing chairman of Taiwan Semiconductor Manufacturing, which provides processor chips for Apple’s iPhone.
President Donald Trump has asked China to reduce its trade deficit with the U.S. by $200 billion by the end of next year, according to various reports. Washington’s bilateral deficit with China currently stands at just over $337 billion. A full-blown trade war between the two countries could impact other aspects of global supply chain management as well as Apple’s continued expansion into China’s smartphone market.
Other analysts believe Apple can withstand the long-term impacts of a trade war given the high degree of flexibility in its supply chain management. However, a trade war could impact the company in the short term.
The Bottom Line
Apple continues to defy expectations of a sharp slowdown in revenue and profitability. As the second-quarter results clearly demonstrate, the company has plenty of room to grow well past the $1 trillion value mark. Based on current price trends, the company is likely to hit that milestone in the very near future.
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