Apple (NASDAQ:AAPL) has absolutely dominated the smartphone market for the past decade, particularly in the Western world, and in doing so has created a formidable ecosystem that competitors find hard to break. The design prowess of Steve Jobs laid the foundation for the current ecosystem of hardware and software created by Tim Cook’s Apple, and investors have enjoyed huge returns since he took the helm in August 2011.
The company released its fourth-quarter 2022 results on Thursday, in an earnings season in which many big tech companies came under fire after weaker-than-expected reports. I also wrote an article Earlier this week, he previewed Apple’s results, urging investors to be cautious due to the many risks that could affect this business.
So did Apple make me look like a fool?
Yes, yes he did it.
Apple earnings summary
Starting at the top, Apple’s fourth-quarter revenue grew 8.1% year over year to $90.1 billion, beating analyst estimates of $88.8 billion. This is perhaps even more impressive when you consider the exchange rate headwinds that have hampered many US-based global companies; At constant exchange rates, year-on-year growth would have been 14%.
Coming to the bottom line, it was another success story for Apple. The company posted EPS of $1.29, which beat analyst estimates of $1.27.
Kudos to Apple; delivered a very strong quarter in an earnings season where the likes of Meta (GOAL) and Amazon (AMZN) fell 20% after the announcement of its results. All of these companies face the same headwinds, namely inflation and a strong US dollar, but so far Apple has stood up to the best of all the big tech companies.
Lots of highlights for shareholders
Despite the difficult macroeconomic environment, this earnings call must have delighted Apple shareholders; it was full of good news, records were broken, and I think I would feel quite smug as a shareholder at this point; on the contrary, I feel a bit embarrassed after this brilliant company proved me dead wrong.
Let’s take a look at some of Apple’s highlights Fourth Quarter Earnings Callwhich I think show cause for optimism going forward, starting with the following gem from CEO Tim Cook:
We hit another record in our installed base of active devices, thanks to a quarterly record for updates and double-digit growth in iPhone Switches. In almost all geographic segments, we achieved a new revenue record for the quarter. And we continue to do incredibly well in emerging markets with very strong double-digit growth in India, Southeast Asia and Latin America.
With Apple’s services business growing and the attractive gross margins it generates, shareholders should be pleased to see a new record for Apple’s installed base of devices. In addition, the records achieved and the strong performance in emerging markets show that, despite being a huge and dominant business, Apple still has several growth levers that it can use.
I said in my previous article that sales of Apple’s new iPhone 14 would be a key element to watch, and the company again performed strongly. Taking another snippet from Cook:
The iPhone grew 10% in the fourth quarter period to $42.6 billion. Customer demand was strong and better than we anticipated it would be. And keep in mind that this is on top of a 2021 fiscal year in which iPhone revenue grew 39%, so it’s a tough comparison too. And so we were happy with it.
In terms of the new products, the 14 and 14 Pro and Pro Max, it’s still very early days. But from the beginning, we’ve been limited in the 14 Pro and 14 Pro Max and we’re still limited today.
There was talk that Apple would have to cut your production for the new iPhones, and I saw this as a cause for concern, well that’s a lesson learned for myself. Apple saw stronger-than-expected demand for its new iPhones, and indeed the constraints were on the production side. Sounds like another successful launch for the next generation of iPhones to me, and this behemoth keeps moving forward.
Services continue to deliver
Apple’s services could well form the basis of any investment thesis for the company, as it has the potential to grow rapidly, as well as offering much higher gross profit margins. Anyone who based their investment in Apple, at least in part, on its services revenue would have been pleased with this quarter, as CFO Luca Maestri put it:
Turning to Services, as I mentioned, we set a record in the September quarter as a whole and in most geographic segments, generating $19.2 billion in revenue despite major currency headwinds.
I’m starting to find it funny how, despite all the global macroeconomic difficulties, Apple seems to keep posting record results; in fact, the word ‘record’ was used an amazing 37 times on the fourth-quarter earnings call.
Apple’s services revenue growth continues to outpace its product growth, growing 14% year-over-year compared to 6% year-over-year for products. It now accounts for 19.8% of Apple’s total revenue, compared to 18.7% in 2021. As the chart below shows, it has consistently outperformed product growth.
Why does it matter? Two reasons.
First, there are only a limited number of people that Apple can sell its high-end devices to. You already have a smartphone market share 48% in the United States, although there are still opportunities for growth both in the country and abroad. However, the smartphone replacement cycle is getting longer, so it’s great news for shareholders that Apple has another growth lever it can use. Furthermore, the more people who have devices in their hands, the more revenue Apple can generate due to the broader reach of its services.
Second, Apple’s service revenue margins are significantly stronger than its product margins; and, these margins have been growing over time.
Gross profit margins in FY22 for Apple services were 71.7%, up from 66.0% in 2020. This compares with gross profit margins for products, which were 36.3%. % in 2022; also increased, but it shows exactly how much Apple services benefit. can bring to the business as it becomes a larger portion of the total revenue.
Quick Take: Global Headwinds
I also want to touch briefly on the geographic distribution of Apple’s revenue, now that its financial year has come to an end. Based on the chart below, it’s evident that Apple experienced a substantial slowdown in several regions this year compared to its three-year CAGR; Perhaps the most worrying is China, as the economy has slowed in this former high-growth region and geopolitical tensions continue to worry investors.
There is also the risk of an economic slowdown in Europe. As someone from the UK, this particular country is feeling the effects of rising interest rates and rising energy prices, leading to some economic hardship and ultimately less money in the pockets of consumers.
While this is something to keep in mind, I think Apple has shown enough strength this quarter to show investors that management can be trusted to deal with the most difficult situations. I’m sure long-term Apple investors will read this and think “yeah, duh, that’s what we’ve been saying for a long time”; All I can do is throw up my hands and admit that I should have seen it before.
AAPL Stock Valuation
I typically look to invest in high-growth, disruptive companies where valuation is difficult. At least with Apple, I feel like I have something a little more stable and predictable, so that’s a treat for me. When a company is more stable like Apple, I think valuation is substantially more important than for a high-growth disruptor. That said, in my valuation model:
I decided to use analyst estimates for my model as Apple is such a big business that it is difficult for me and my limited data to fully analyze future prospects. I have also allowed for slightly higher and lower multiples to demonstrate possible additional advantages and disadvantages.
Put all of that together, and I can see Apple stock achieving a CAGR through 2026 of 1%, 5%, and 13% in my respective bear, base, and bull case scenarios. I also think that services could significantly expand this EBIT margin over time, so perhaps the performance is closer to the 13% upside scenario.
I wasn’t particularly optimistic about Apple’s fourth quarter results, but this company proved me wrong. When all other big tech stocks were getting crushed, Apple somehow delivered another strong set of results, despite broader macroeconomic headwinds.
It’s fair to say that this quarter has done enough to convert me; as such, I am changing my rating on Apple stock from ‘Hold’ to ‘Buy’. I would still be cautious, and I think there will be more attractive pricing in the future, but the fourth quarter showed that this is a reliably brilliant (or brilliantly reliable?) business that would be a solid addition to any portfolio.