Record service revenues make Apple a stock to consider buying

Despite declining iPhone sales and lower overall revenues, Apple stock is on the up. Stephen Wright looks at what investors should focus on.

| More on:
Fans of Warren Buffett taking his photo

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Apple (NASDAQ:AAPL) stock is rising after the company’s most recent earnings report. As expected, the firm has been struggling with iPhone sales and this weighed on overall revenues.

The company also announced a $110bn share buyback programme and hinted at a major artificial intelligence (AI) launch for its iPads. And the market seems to be viewing this positively.   

iPhone sales

Apple’s revenues came in 4% lower than during the first quarter of 2023. This was largely expected and it was equally unsurprising that the biggest decline came from iPhones (-10%) and China (-8%).

There were some positives though. Services revenue grew 14%, causing margins to widen and earnings per share (EPS) to come fractionally ahead of the previous year. 

With both services revenue and EPS hitting record highs, the company boosted its shareholder returns. This came in the form of a $110bn share buyback programme. 

Overall, there weren’t any new risks for shareholders to worry about. That’s probably important – with antitrust concerns and issues in China, shareholders have enough to focus on for now. 

Was the report that good?

Apple chief Tim Cook pointed out that 2023’s sales were boosted by $5bn in iPhone revenues delayed due to supply chain issues. Without this, overall revenues were up slightly and iPhone sales were steady.

I’m not sure this should encourage investors. While it might be realistic, the fact the latest numbers are a better reflection of the business than last year’s stronger numbers isn’t a positive thing.

As an Apple shareholder, I’m much more enthusiastic about the service revenue growth. I’ve thought for a while that this is the part of the business that investors should focus their attention on.

Not everyone agrees – and I accept that strong services growth can’t offset weak product sales indefinitely. But I view the report positively because of the services revenue, not the fact the decline in iPhone sales isn’t as bad as it looks.

Shareholder returns

At today’s prices, Apple’s $110bn share buyback programme could reduce the outstanding share count by just over 4%. That’s a significant return. 

Repurchasing shares is risky though. A company buying back shares when they’re overpriced leaves shareholders worse off than if the company had done nothing.

Warren Buffett has been a vocal supporter of Apple’s share buybacks. But it’s probably worth noting that the Berkshire Hathaway CEO hasn’t added to the company’s stake in the iPhone manufacturer.

Berkshire actually reported a decline in its Apple holdings in its most recent 13F filing. But I doubt this was Buffett – I think it’s much more likely to have been a sale via the Gen Re portfolio.

Should investors buy Apple shares?

After a positive response to the latest earnings report, Apple shares are within 8% of their all-time highs. That’s unusual for a business that just announced declining revenues.

Despite this, I think the market’s underestimating the company’s strengths and overestimating the current risks. That’s easy to do, but it might be creating a buying opportunity for investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Apple and Berkshire Hathaway. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Nvidia stock is becoming more affordable!

Nvidia stock is up 2,500% over five years, but the chip giant’s share split -- announced during its earnings report…

Read more »

Investing Articles

Are Rolls-Royce shares good for passive income?

Our writer is getting mixed messages about the Rolls-Royce dividend. But whatever happens, he thinks passive income hunters will be…

Read more »

Investing Articles

Could the Rolls-Royce share price end 2024 above £5?

As the Rolls-Royce share price continues its remarkable run, our writer considers where it might be at the end of…

Read more »

Investing Articles

UK stocks are hitting all-time highs! Yet these 2 still look cheap to me

The FTSE 100's on a roll. But it's still possible to pick bargain UK stocks, provided we know where to…

Read more »

Satellite on planet background
Investing Articles

At just under £14, can BAE Systems’ share price still be a prime FTSE 100 bargain? 

Despite its bullish price run, BAE Systems’ share price still looks undervalued to me and appears set for strong growth.

Read more »

Photo of a man going through financial problems
Investing Articles

2 dividend shares I’d avoid like the plague in today’s stock market

The UK stock market is full of high-yield dividend shares that could equate to a steady stream of passive income.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

£17,000 in savings? Here’s how I’d aim to turn that into a £29,548 annual second income!

Generating a sizeable second income can be life-enhancing and can be done from relatively small investments in high-dividend-paying stocks.

Read more »

Investing Articles

With as little as £300 a month invested, this stock could net £16,000 a year in passive income

Putting a few hundred pounds each month into the stock market could eventually generate a five-figure annual passive income, this…

Read more »