The Apple (NASDAQ:AAPL) share price looks set to lower Friday after its Thursday (2 November) earnings report. Immediately following the release, the stock slipped 3% in extended trading.
Yet unlike the broader market, I thought results were positive overall. As an Apple shareholder, I’m watching the stock closely to see if there’s a further buying opportunity for me.
The details
Let’s start with the details of the Apple’s earnings report. Net sales came just shy of the same time a year ago – $89.5bn compared to $90bn.
Earnings per share, however, were up 14%, from $1.29 to $1.47. Both revenues and profits came in ahead of analysts’ expectations.
All of this was reasonably encouraging. But there were a couple of issues for investors to be wary of.
One is that hardware revenues came in lower than 12 months ago. And while iPhone sales continued to grow, all of the other categories slipped back.
The main weakness was management’s revenue guidance of around $117.2bn for the next three months. That’s in line with last year’s results, but short of the $122.8bn analysts were expecting.
Revenues and profits
Apple shares currently trade at a price-to-earnings (P/E) ratio of around 29. So it’s easy to see why analysts might be disappointed by a forecast of zero sales growth.
This is only part of the story, though. I think the fact that the company managed to grow its earnings per share despite non-existent revenue growth is more significant.
There are two reasons the firm’s EPS went up even though its top line didn’t. The first is its margins expanded.
Apple’s services division grew revenues by 16%, offsetting declines in hardware. Since this part of the business has a 70% gross margin, compared to 37% in products, overall margins came in higher.
Second, the company has reduced its share count from 16.1m to 15.7m over the last 12 months. As a result, each remaining share now has a claim on a greater portion of the company’s earnings.
Looking ahead
I think these two features mean the company has the capacity for further earnings growth ahead. Even if overall sales remain static, EPS can continue to grow.
Furthermore, revenues from the iPhone – the company’s most important hardware product – remained resilient. And the outlook on this front is encouraging to me.
According to a survey from Piper Sandler, 87% of US teens own an iPhone and 88% expect their next phone to be an iPhone. I think this is highly encouraging.
One of the key features of Apple’s ecosystem is that people that are in it tend to stay in it. So the huge teen following the company has seems to me to bode well for the future.
A buying opportunity?
Macroeconomic headwinds are a clear issue for the stock in the short term. And even accounting for a 3% decline, it looks expensive to me at today’s prices, adding to the risk.
I’m certainly not saying the market is wrong to think that slowing revenue growth is a legitimate source of concern. But it’s not the be-all and end-all of the company’s growth prospects.
The Apple share price has some way to fall before I look to add to my investment. But the negative investor sentiment has put the stock firmly back on my watchlist.
