After its most successful year in the post-Steve Jobs era, Apple stock continues to tear up the market after an earnings report that smashed all expectations
Feb. 1, 2020
This time last year, analysts were turning bearish on Apple (NASDAQ: AAPL) as the most valuable brand in the U.S. began to experience alarming rates of iPhone sales decline. Fast forward 12 months and the company looks to be back on top, having closed out one of its most successful years to date. The company’s stock rose 2% following its earnings call on January 28.
What happened at Apple’s earnings call?
Apple’s Q1 2020 earnings report was a massive success, as the iPhone maker saw revenue rise 9% to $91.8 billion, beating all expectations, while earnings per share came in at $4.99 versus $4.55 estimated. However, this was not the story of the day.
Despite the continued reports of declines in sales, iPhone sales actually rose 8% over the holiday period, with the iPhone 11 range’s success bringing total revenue up to $56 billion. Not bad for a product in decline!
Where oh wearables?
The very product that put Apple on the map has finally been surpassed by Apple’s wearables segment. Apple’s catch-all category, which includes AirPods and the Apple Watch among a range of other items, surged to $10 billion last quarter, overtaking Mac.
Where Apple’s main competitor was once arguably Microsoft (NASDAQ: MSFT), its diversification in recent years has brought it into competition with companies ranging from Fitbit (NYSE: FIT) to Google (NASDAQ: GOOGL) (NASDAQ: GOOG). The Apple Watch and Airpods have become a major revenue driver for Apple recently, claiming a share of 38% and 55% in their respective markets. For a relatively young range of products — AirPods only released in December 2016 and the Apple Watch in September 2014 — it has been a massive success story.
The new crown jewel
As impressive as Apple’s wearables have been over the past year, it still doesn’t touch the success of the company’s switch to a services model. Apple’s services business, which comprises online software like iCloud, warranties like AppleCare, and content like Apple TV+, was up 17% year-over-year to $12.7 billion. CEO Tim Cook specifically referenced success with Apple TV+, the company’s answer to Netflix (NASDAQ: NFLX) and Disney’s (NYSE: DIS) Disney+.
As well as this, Apple Music has been enjoying great success, with the service overtaking Spotify (NYSE: SPOT) in paid U.S. subscribers last year. With more than 1.5 billion active devices worldwide and an estimated 500 million paid subscribers across all of its services, Apple has certainly not left all of its eggs in one basket.
Are there some cracks showing though?
Despite it seeming like Apple is now king of the world, there were still some reasons for concern among investors. Apple’s guidance range for the next quarter was much wider than usual at $63 billion to $67 billion due to concerns surrounding the ongoing coronavirus crisis in China.
“As you can see from the range, it anticipates some level of issue there. Otherwise, we would not have a $4 billion range,” Cook said.
Investors have also expressed concerns as to how much higher this seemingly unstoppable stock can go. Some analysts cautioned that there are limits to Apple’s growth prospects and its shares are fully valued. This means that the stock market has pushed the upside as far as it can go and further gains from here will push it into overvalued territory.
This sentiment is driven largely by the fact that iPad, Macbook, and over the past year iPhone sales growth has stagnated, potentially overwhelming a tripling of gross profit in the services section.
Apple’s cash pile
Most investors won’t be too worried about a company that continues to innovate, especially as it boasts one of the largest cash piles of any U.S. company at more than $207 billion. This gives the company a cushion of confidence should there be a market downturn in the near future. As well as that, it also gives the company massive potential in research and development, or even the ability to purchase a company and diversify into yet another market.
Perhaps Slack (NYSE: WORK), valued at $11 billion, would be open to a buy-out? One can dream.
With shares continuing to rise in 2020 and its price up more than 100% on this time last year, Apple could be set for another successful 12 months.
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