Apple Inc. Earnings: Look Beyond The Headlines

While iPhone sales were below forecasts, Apple Inc. (NASDAQ:AAPL) is still delivering a rock-solid financial performance.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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.

This article was originally published on Fool.com

WASHINGTON, DC — Apple (NASDAQ: AAPL.US) stock was plunging by 7% on Tuesday after official market hours, as investors showed their disappointment with the company’s earnings report for the third quarter of 2015. However, while iPhone sales were below expectations, the overall picture is not nearly as dismal as the initial price reaction would indicate. 

Financial performance

Total earnings per share came in at $1.85, better than the $1.81 average Wall Street forecast, and growing by almost 45% year over year. Revenue was ahead of forecasts, too, as Apple delivered $49.6 billion in total sales versus an average forecast of $49.3 billion, representing a solid 33% annual increase. 

Gross margin was 39.7% of sales during the quarter, a small increase from 39.4% in the same period last year. The company’s guidance was for gross margin to be in the range of 38.5% to 39.5%, so the number came in above Apple’s own forecasts. Wall Street analysts polled by FactSet were expecting 39.5% in gross margin, meaning Apple outperformed both its own guidance and Wall Street expectations on the margin front.

Over the nine-month period ended on June 27, Apple produced $67.8 billion in operating cash flow. The company reinvested $7.6 billion in capital expenditures, leaving $60.2 billion in free cash flow. That’s a big 48% increase from $40.8 billion in free cash flow over the same nine-month period in 2014. 

Apple distributed $8.6 billion to investors via dividends and $22 billion in the form of buybacks over the first nine months of fiscal 2015. When considering cash and liquid investments, Apple is sitting on a massive cash hoard of nearly $203 billion on its balance sheet.

On products and growth drivers

The company sold 47.5 million iPhone devices during the quarter, a 35% increase over the same period last year. Wall Street analysts were on average expecting 49 million units, so the number was marginally below expectations. Prices were remarkably strong, though. The average selling price in the iPhone segment was $660, a record for Apple. In terms of revenue, iPhone sales grew 59% to $31.4 billion, and the product represents a dominant 63% of total sales.

Most companies can only envy the kind of growth Apple is enjoying in the iPhone segment, but short-term stock market reactions are usually about data versus expectations, and Wall Street was expecting even more growth from the iPhone. This is probably the biggest negative in the report.

iPad unit sales declined 18% to 10.9 million, while Mac sales increased 9% to 4.8 million computers sold during the quarter. Both products were broadly in line with expectations.

Apple didn’t provide specific sales figures for the much-awaited Apple Watch in the earnings release, but sales in the “other products segment,” which includes sales of Apple Watch, Apple TV, Beats Electronics, iPod, and third-party accessories, grew 49% to $2.6 billion.

CEO Tim Cook said in the press release that Apple Watch was off to “a strong start,” but chances are the company will face more questions regarding specific sales figures for Apple Watch during the earnings conference call. 

China was quite strong, especially considering the growing concerns about economic instability in the country. Total revenue in the Greater China region jumped 112% year over year during the last quarter, reaching $13.2 billion and accounting for almost 27% of total company-level revenue.

iPhone unit sales were below Wall Street forecasts, but the device is still selling like hotcakes, and pricing trends are quite encouraging. Both total revenue and profitability were remarkably strong and better than forecasted, so investors in Apple stock have no reason to panic when it comes to the overall health of the business. Short-term reactions to earnings announcements are many times misguided and exaggerated, and this seems to be the case with the latest release from Apple.

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.

The author of this post, Andrés Cardenal, owns shares of Apple. The Motley Fool owns shares of Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »