Why Is Apple (AAPL) Up 8.2% Since Last Earnings Report?
It has been about a month since the last earnings report for Apple (AAPL). Shares have added about 8.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Apple due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Apple's Q2 Earnings Beat, Services Aid Sales Growth
Apple reported second-quarter fiscal 2020 earnings of $2.55 per share that beat the Zacks Consensus Estimate by 22% and increased 3.7% year over year.
Net sales increased 0.5% year over year to $58.31 billion, which surpassed the Zacks Consensus Estimate by 8.7%. Forex volatility negatively impacted sales by 100 basis points (bps).
Product sales (77.1% of sales) decreased 3.4% year over year to $44.97 billion. The decline can be attributed to coronavirus-related lockdowns and store closures during the last three weeks of the reported quarter.
Services (22.9% of sales) revenues grew 16.6% from the year-ago quarter to $13.35 billion, a record in the company’s history.
Geographical Performance
Americas sales declined 0.5% year over year to $25.47 billion and accounted for 43.7% of total sales.
Europe generated $14.29 billion in sales, up 9.5% on a year-over-year basis. The region accounted for 24.5% of total sales.
Greater China sales fell 7.5% from the year-ago quarter to $9.46 billion and accounted for 16.2% of total sales.
Japan sales declined 5.9% year over year to $5.21 billion and accounted for 8.9% of total sales.
Rest of the Asia Pacific generated sales of $3.89 billion, up 7.5% year over year. The region accounted for 6.7% of total sales.
iPhone Sales in Detail
iPhone sales decreased 6.7% from the year-ago quarter to $28.96 billion and accounted for 49.7% of total sales. Both demand and supply were negatively impacted by the outbreak of coronavirus.
Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 99% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined.
Services Momentum Continues
Services maintained momentum in the reported quarter. Robust performance of App Store, Apple Music, Video, cloud services, and App Store search ad business drove Services revenues.
App Store revenues grew by double digits. Both Apple Music and cloud services, set an all-time revenue record, while AppleCare reported the best second-quarter performance in the company’s history.
Moreover, Apple’s new services — Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card — continued to add users, content and features.
Apple now has more than 515 million paid subscribers across its Services portfolio, up 35 million sequentially and 125 million year over year. The company now expects to reach its target of 600 million paid subscriptions before the end of calendar 2020.
Moreover, the number of paid accounts increased double digits across all geographic segments.
Third-party subscription revenues increased 30% year over year. Paid subscriptions of Apple Music, cloud services and AppleCare were up double digits.
iPad & Mac Details
iPad sales of $4.37 billion decreased 10.3% year over year and accounted for 7.5% of total sales.
Mac sales of $5.35 billion decreased 2.9% from the year-ago quarter and accounted for 9.2% of total sales.
Additionally, more than half of customers, who purchased iPads and Macs during the quarter, were new to the device.
Apple quoted a recent survey report from 451 Research, which stated that overall consumer satisfaction was 95% for iPad and 96% for Mac.
Wearables’ Robust Performance
Wearables, Home and Accessories sales increased 22.5% year over year to $6.28 billion and accounted for 10.8% of total sales.
Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers, who purchased Apple Watch during the reported quarter, were first-time customers.
Apple Gaining Traction Among Enterprises
Employees of International Business Machines and SAP, two large customers of Apple, were able to easily set up and secure their devices from home, with support from Apple Business Manager and zero-touch deployment to adhere to coronavirus-led shelter-in-place guidelines.
The company also stated that Peloton deployed “an entire fleet of Macs overnight.” Bank of America also purchased tens of thousands of additional iOS devices for its workforce.
Moreover, Apple’s products gained traction in sectors like grocery and financial services.
Apple Pay has been offered by the likes of Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl and Carrefour to promote and support contactless payments.
Operating Details
Gross margin expanded 70 bps on a year-over-year basis but was flat sequentially at 38.4%.
Products gross margin contracted 380 bps sequentially to 30.3%, due to loss of leverage and unfavorable mix. The coronavirus outbreak dragged down product gross margin.
Services gross margin was 65.4%, up 100 bps sequentially, driven by a favorable mix.
Operating expenses rose 13.2% year over year to $9.52 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses, which increased 15.6% and 11.1%, respectively.
Operating margin contracted 110 bps on a year-over-year basis to 22%.
Balance Sheet & Cash Flow
As of Mar 28, 2020, cash & marketable securities were $192.84 billion compared with $207.06 billion as of Dec 28, 2019.
Term debt, as of Mar 28, 2020 was $99.48 billion, up from $93.08 billion as of Dec 28, 2019.
Apple returned $22 billion in the reported quarter through dividend payouts and share repurchases.
Apple’s board also authorized $50 billion for share repurchases in addition to more than $40 billion authorization remaining under the current share repurchase plan. The company also raised quarterly dividend by 6%.
Guidance
Apple didn’t provide any guidance given the uncertainty around the impact of the coronavirus pandemic. However, the company stated that forex, due to U.S. dollar appreciation, will hurt revenues by $1.5 billion year over year.
Moreover, the company expects second-quarter iPhone and Wearables business revenues to be worse on a year-over-year basis than the first quarter. On the contrary, iPad and Mac revenues are expected to improve.
Services are expected to benefit from strong usage of App Store, Video, Music and cloud services. However, lower economic activity is anticipated to hurt AppleCare and advertising.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months.
VGM Scores
Currently, Apple has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Apple has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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