Shares of Dow-component Apple (AAPL – Free Apple Stock Report) are being bid up by investors, to a fresh 52-week high, after the tech behemoth posted better-than-expected results for the third quarter of fiscal 2018 (year ends September 29th) and provided an upbeat view of its near-term prospects. For the period, earnings came in at $2.34 a share, nicely ahead of our $2.18 estimate and an impressive 40% above the year-earlier tally. The company recorded a beat on the top line, too, with revenue reaching $53.3 billion versus our $52.0 billion call. This was despite iPhone unit sales (of 41.3 million) that were basically flat on a year-over-year basis and a touch lower than we or Wall Street had envisioned.
Although unit shipments may have been on the soft side, the average selling price (ASP) of Apple's mainstay smartphone continued to rise, hitting $724 during the June interim. This trend, a testament to the global popularity of the latest devices, including the ultra-premium iPhone X model that retails at price points starting at $999, boosted gross margins and lifted the top line. And the momentum seems apt to persist, particularly with another next-generation smartphone likely to be released in the fall.
The company, meanwhile, continues to diversify its revenue stream, so as to be less reliant on the maturing smartphone market going forward. And these efforts look to be paying off handsomely thus far, as evidenced by the excellent progress from the ``Other Products'' category (e.g., Apple Watch, Beats headphones, Airpods, and the new HomePod), and by the blistering growth in the high-margined services business.
Notably, services revenues jumped 28% in the fiscal third quarter, to a nearly $9.6 billion. And the segment, led by Apple Care, Apple Pay, iCloud, iTunes, and the App Store, shows no sign of slowing down. In fact, the company indicated that it's on track to attain its goal of doubling its fiscal 2016 services revenues by 2020. This target may even prove to be conservative, we think, given the ``halo effect'' from the large iPhone installed base and the fast pace at which Apple Pay is gaining traction. There were over one billion Apple Pay transactions in the June period, triple the amount from a year earlier, notwithstanding strong competing services from the likes of Square and PayPal.
All in all, the third-quarter performance was very encouraging, and puts Apple on course to be the first company to have a $1 trillion market capitalization. Though some macroeconomic concerns linger, especially the trade dispute between the U.S. and China, we are cautiously hiking our fiscal 2018 share-net estimate by $0.35 (to $11.75) and our bottom-line call for next year by $0.90 (to $13.75). We still like this large-cap issue for most investors, too, and view it as a relative bargain in an otherwise frothy U.S. equity market.
About the Company:Apple Inc. is one of the world’s largest makers of PCs and peripheral and consumer products, such as the iPod digital music player, the iPad tablet, the iPhone smartphone, and the Apple Watch, for sale primarily to the business, creative, education, government, and consumer markets. It also sells operating systems, utilities, languages, developer tools, and database software.
- Justin Hellman
