Apple Revenues Fall - Yet Soars After Hours On Earnings Beat
Apple beat estimates on the top and bottom line which means Alphabet is the lone loser out of big internet firms this earnings season. Heading into earnings season, I was very interested to see how their stocks would react to their results given their amazing run this year.
We’ve seen all their revenue growth rates fall outside of Microsoft, but for most of these firms, this deceleration was baked into expectations. Alphabet did a poor job of managing expectations.
Apple reported $2.46 in EPS which beat estimates for $2.36. Revenues were $58.02 billion which beat estimates for $57.37 billion. The stock rallied 5.04% after hours because the firm put out Q3 revenue guidance of between $52.5 billion and $54.5 billion which beat estimates for $51.94 billion.
Apple stock has done well in large part because of its huge buyback. The firm announced an additional $75 billion in buybacks this quarter. It also announced a dividend of 77 cents per share which is a 5% increase. It returned $27.5 billion in cash to shareholders last quarter. In this quarter gross cash fell 16% yearly to $225 billion.
Apple Revenues Fall - As Firm Moves Towards Services
As you can see from the chart below, Apple’s revenue was down 5.1% year over year.
Out of the big internet names, it is the only one with falling revenue. Apple even had worse growth than Intel which is considered more of an ‘old line’ tech firm. It’s interesting to see that the positive spin from this quarter is Apple is diversifying away from the iPhone. My response is, “but at what cost?”
If Apple didn’t have its services division, revenue growth would have been even worse, but let’s not kid ourselves into thinking Apple’s business is growing. Its EPS is growing because of its enormous buyback. That’s something Alphabet should copy.
Q2 iPhone revenues were $31.05 billion which missed estimates by $50 million. Obviously, that’s not a big miss. But if it would have beaten estimates, iPhone revenues as a percentage of total revenues would be higher. On the other hand, services revenues beat estimates for $11.37 billion as they came in at $11.45 billion.
Apple Revenues Fall - Details Of This Report
As you can see from the chart below, gross margins were 27.6% which was the lowest rate in at least 2 years.
Operating margins were 22.1% which was also the lowest rate in at least 2 years. That’s what happens when the firm diversifies away from iPhone. It’s not as if this is a voluntary choice. The smartphone market is saturated, innovation is gradual, and people are using their devices longer.
People used to buy a new phone every 2 years due to carrier subsidies, but now it’s not uncommon to see people using the same phone for 3 or 4 years. As you can see, 12 month trailing product growth on a quarterly basis was -2.13%. It was 3.97% for services which pushed services revenues’ share of the business up to 20% from 13% and product revenues’ share down from 87% to 80%.
Apple Revenues Fall - Revenue Breakdown
The chart below gets at the point I’ve been making throughout this article.
As you can see, iPhone revenues were only 53.5% of the business. Services hit a new high as they were 19.7% of the business. Apple still heavily relies on iPhone sales because people subscribe to services using their Apple devices (mostly iPhones). It’s amazing to see people miss this obvious point.
Apple’s services revenue which consists of iCloud, Apple Music, AppleCare warranties, and others grew 16% yearly.
Good news for Apple is this quarter is just the beginning for the services category because it doesn’t include its latest announcements. Apple Arcade and Apple TV+ will launch this fall and Apple Card will come out this summer. Apple didn’t update its number of devices still in use. The last update was 1.4 billion.
Apple Revenues Fall - Yet The firm stated it hit a new record across all categories this quarter.
Apple’s Wearables business, which includes Apple Watch, AirPods, and other headphones such as Beats, had revenue growth of 50%. The Wearables, Home, and Accessories category had revenues of $5.1 billion which beat estimates for $4.79 billion.
Non-iPhone categories drove strong guidance. iPad had a strong quarter as iPad Pro did well. iPad had revenues of $4.87 billion which beat estimates for $4.21 billion. Finally, Mac reported revenues of $5.5 billion which missed estimates for $5.85 billion.
Apple Revenues Fall - Excessive Optimism In The Overall Market
Even with Alphabet’s biggest decline in 6 years, the S&P 500 increased 0.1% to a new record high. It is now up 17.51% year to date. It is already closing in on the 19.42% gains in 2017 which were partially based on expectations for a huge tax cut.
Gains this year are based on an expected recovery. They are also based on the fact that stocks started the year very cheap. Tax cuts boosted earnings least year, but stocks fell 5.3%. Nasdaq fell 0.66% and the Russell 2000 fell 0.45%. Russell 2000 is far below last year’s record high, but it’s up 17.99% year to date.
Apple Revenues Fall - Technically speaking, the stock market is very overbought.
That’s no surprise as the market hasn’t had a meaningful correction this year. The biggest decline this year is only 2.48%. The CNN fear and greed index fell from 71 to 66 even though stocks increased on Tuesday. As I mentioned a couple weeks ago, stocks can power through excessive levels if earnings are strong.
However, most of earnings season is now over; investors will soon get back to reviewing the mediocre economic reports. Stocks should correct in May.
As you can see from the chart below, the Ned Davis Research daily trading sentiment reading is at 77.79 which is one of the most excessive readings in the past 2 years. Clearly, it’s at the highest point since last June. It’s very close to the sentiment peak in January 2018.
