By Anirban Mahanti, PhD
This earnings season has been brutal for big tech companies. Microsoft MSFTAlphabet GOOGand Amazon AMZN saw their shares scrapped after their earnings releases.
However, Apple AAPL has escaped unscathed, with the share price up more than 5% at the time of reporting. Looking back over the past year, Apple has been like the Rock of Gibraltar, while everyone else has seen their valuations plummet.
Performance of Apple, Microsoft, Amazon and Alphabet during the last year.
For a long time, and perhaps even today, Apple has been considered a highly cyclical business that ebbs and flows with the broader business cycle. There has also been thought of a smartphone-only business that has saturated its core.
On the other hand, Microsoft is thought to be more resilient due to its entrepreneurial roots. Then there’s Alphabet’s Google search, which is seen as resilient and perhaps has a much longer growth path.
But over time, Apple’s leadership team has shown us the value of careful cost management and the incredible value of thinking long-term.
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Ending fiscal year 2022 in style
And so, we have Apple ending fiscal 2022 in style, fourth quarter 2022 report income of $90.1 billion, a new record, up 8% year over year. Those results may not seem impressive at first glance, but they are due to a 29% year-over-year increase in the fourth quarter of 2021, with an exchange rate headwind of 6%. In other words, Apple would have grown by double digits without those currency headwinds.
Remarkably, free cash flow for fiscal 2022 was $112 billion, up 20% year over year. That growth at scale is impressive. And you can contrast that with Meta’s GOAL apocalyptic quarter, where free cash flow production imploded!
Apple is meticulous about its capital expenditures and returns excess cash to shareholders at a breakneck pace. This quarter, shareholders received $3.7 billion in dividends and $25.2 billion went toward the repurchase of 160 million shares. Since the start of Apple’s share buyback program, the company has spent more than $550 billion buying back shares at an average price of $47.
But share buybacks and free cash flow generation for fiscal 2022 are now in the rearview mirror. So what did management say that makes the market optimistic about the company’s future?
the future is bright
First, iPhone demand appears to be strong, contrary to several rumors suggesting a weakening in demand. As I noted earlier, it’s aggregate iPhone sales that matter rather than whether a model is in lower demand than expectations. In the September quarter, iPhone sales grew 10% year over year to $42.6 billion, a record, despite significant currency headwinds. Demand remains strong in most geographies and “performance was particularly impressive in several large emerging markets,” including a new all-time high in India. Tim Cook, in response to an analyst’s question, said:
Customer demand was strong and better than we anticipated it would be. And keep in mind that this is on top of a fiscal year of 21 in which iPhone revenue grew 39%, so it’s also a tough comparison. And so we were happy with it.
Cook went on to add:
…from the beginning, we’ve been limited in the 14 Pro and 14 Pro Max and we’re still limited today.
In other words, iPhone demand remains strong. Add an all-time record for Mac and strong growth for Wearables, Home and Accessories, and we have a reliable performer across the board. It means that the Apple ecosystem continues to get stronger, which bodes well for the company’s future. CFO Luca Maestri amplified this point when he spoke about Apple’s subscription business:
We now have over 900 million paid subscriptions to Services on our platform, over 155 million over the last 12 months alone and double what we had just 3 years ago.
Apple’s engine runs full steam ahead. The company’s qualitative guidance for the first quarter of 2023 forecasts a slowdown in growth relative to 8% in the fourth quarter of 2022. Maestri expects exchange rate headwinds to have a negative impact of 10% year over year . So if Apple offers 5% growth, in currency-neutral terms, that translates to mid-teens. that means so much more cash generationa good amount of dividends and ample buybacks.
The conclusion of 7investing
Apple’s disciplined cost management shows us how a company can innovate without spending like a drunken sailor. The company’s services business generates revenue like a Fortune 50 company. Competitors would kill to have a business like the Apple Watch, iPad or Mac. They might be giddy with performance that’s half that of Apple.
With an ever-expanding installed base of loyal customers, Apple is still the best positioned to usher in the next computing platform, be it augmented or virtual reality or something else entirely.
About the Author: Anirban Mahanti is a Senior Advisor to 7investing. Prior to 7investing, Anirban spent over 5 years at the Australian subsidiary of The Motley Fool in various roles, including as Research Director and Founding Senior Advisor to market-leading small-cap ASX stock picker newsletter Extreme Opportunities. You can follow Anirban on Twitter at by clicking this link.