Apple (AAPL – Free Apple Stock Report) stock is building upon its recent momentum, climbing to near the $220 level, after the tech giant released an encouraging earnings report for the third quarter of fiscal 2019 (year ends September 28th). In fact, share net of $2.18 for the period clocked in nicely ahead of our estimate and Wall Street's consensus view of $2.10, despite a (slightly) worse-than-anticipated 12% drop in iPhone sales. And the company issued strong fourth-quarter guidance, calling for revenues to come in between $61 billion and $64 billion (versus our $60.1 billion call). This suggests that Apple is returning to a healthy growth mode, and further transitioning away from its reliance on the core smartphone franchise.
While iPhone revenue was mildly disappointing during the fiscal third quarter, sales trends showed welcome signs of stabilizing, especially in China, where the company was more aggressive on pricing and introduced new trade-in and financing initiatives. The installed base of iPhones also continued to expand (it reached another all-time high), creating an enormous platform for selling high-margined services and other connected devices. And the strong December-term guidance implies that Apple has high hopes for its next-generation smartphone models (that are likely to debut in September).
Meanwhile, as suggested, the company's non-iPhone businesses continue to shine. In particular, the wearables segment, including AirPods, the Apple Watch, and Beats headphones, generated robust growth in excess of 50% in the third quarter. And the services unit, where margins are well above the company's average, posted record sales, led by brisk user growth for the Apple Pay digital wallet and greater traction for most everything else, from cloud storage to the App Store.
Turning to the balance sheet, the company remains in great financial shape, with roughly $210 billion in cash assets and long-term marketable securities on its books. It also continues to reward shareholders with generous dividend and stock-buyback programs. Notably, during the third quarter alone, Apple repurchased nearly 88 million shares for $17 billion. And it paid about $3.6 billion in cash dividends.
All in all, it was a good earnings report from Apple, one justifiably being cheered by the bulls. In its wake, we are raising our fiscal 2019 share-net call by $0.25, to $11.65, and increasing our profit view for next fiscal year from $12.70 to $13.65 a share. We still like this Dow component for buy-and-hold investors, too, and expect it to produce solid risk-adjusted returns as we head out to 2022-2024.
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
