Apple (AAPL 200.45, +10.16, +5.34%) is trading up 4% at all-time highs pre-market
after the company reported better than expected third quarter results last
night, highlighted by upside in iPhone ASPs and service revenue.
Fiscal third quarter revenue grew 17% to $53.3 bln, towards the high end of its $51.5-53.5 bln forecast. That represents the eighth straight quarter of revenue growth improvement -- an impressive feat for the largest publicly traded company in the world.
What's even more remarkable: the company was able to grow iPhone revenue 20% as shipments grew just 1%. It is well known that there isn't much growth in the smartphone market these days. Apple's dominance at the high end of the smartphone market is quite a sweet spot as the rest of industry players fight for far less-profitable or even unprofitable market share. iPhone shipments of 41.3 mln narrowly missed estimates, but the average selling price (ASP) of the iPhone was up a whopping 19% year/year to $724, well above estimates, as the iPhone X was the company's top selling handset.
The combination of a growing installed base of iPhone users and higher prices means Apple should be able to continue driving growth on the top and bottom line despite the saturated and lukewarm smartphone market.
The other bullish development was service revenue, which grew 31% to $9.55 bln, also above estimates. Similar to Amazon (AMZN), Apple's scale is starting to churn out enviable profits from its massive ecosystem of software services that people depend on without thinking twice.
Apple said it is on track to double service revenue by 2020 (to nearly $50 bln from $24.3 bln in 2016).
The iPhone is clearly Apple's bread and butter, but the simplicity and popularity of the mobile operating system iOS keeps consumers stuck in Apple's ecosystem.
Apple also offered upside revenue guidance for the fourth quarter. The strong outlook indicates that the company will be able to avoid production delays that occurred with the iPhone X last year.
Apple is expected to unveil three new iPhone models in September, all of which are expected to have Face ID (3D sensing facial recognition): an updated iPhone X, a larger iPhone X, and a new lower end phone that will stick with LCD screens (though the flagship device moved to OLED last year).
With a market cap of ~$980 bln premarket, Apple looks like it will win the race to $1 trillion (the 'finish line' is ~$203/share).
The stock trades at 17x EPS, or 15x estimates for next year. The P/E ratios are roughly two turns lower when backing out the ~$244 bln in cash and liquid investments.
The burgeoning service revenue is cause for multiple expansion, investors would argue. For perspective, there are a slew of unprofitable but fast-growing software companies that garner 10x sales multiples.
Warren Buffet usually stays away from technology stocks, but Apple is also a consumer play, and it’s his largest position.
Apple stock seemingly needs to hold up well this session, otherwise the recent weakness in the technology sector may hit a tipping point.
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