Despite multiple headwinds, the world’s largest company by market capitalisation and iPhone maker Apple Inc (NASDAQ: AAPL) reported strong earnings growth that surpassed analysts’ expectations during Q2 FY2023.
Revenue came in at US$94.8 billion, a decline of 3% year-on-year (yoy) but beat Wall Street estimates of US$92.9 billion.
Record-breaking iPhone revenue of US$51.3 billion in the March quarter significantly contributed to this strong performance, accounting for 54% of total sales.
Apple’s robust pricing power led to unchanged earnings per share (EPS) of US$1.52, compared to the prior-year quarter, exceeding market expectations of US$1.43 in EPS.
Additionally, services revenue reached an all-time high of US$20.9 billion, signifying resilience despite the economic headwinds.
However, Mac and iPad sales saw declines, with revenue falling by 31% yoy and 13% yoy to US$7.2 billion and US$6.7 billion, respectively.
I believe with the record iPhone sales in the quarter – led by sales in India and the emerging markets such as Brazil and Mexico – will propel Apple’s earnings to new heights in the near future.
Record iPhone Sales to Push Apple Earnings to New Heights
For Apple, selling an iPhone in an emerging market represents more than just the sale of one device.
Growing iPhone sales in emerging markets represents an opportunity to pull in new consumers within the Apple ecosystem of devices and services over time.
By initially engaging with an iPhone, customers may eventually invest in additional products, such as Apple Watch, AirPods, or even subscribe to various Apple services.
Apple CEO Tim Cook said he saw opportunities for Apple in India in services but said that average revenue per user – a metric known as ARPU in the subscription business – would take time to catch up to Apple’s other markets.
Strong iPhone sales driven by growth in emerging markets
Cook attributed Apple’s strong iPhone sales to emerging markets like India, Mexico and Brazil, where the company is luring away Android phone users.
Cook believes that these markets, with their young demographics and relatively low iPhone saturation, offer significant growth potential.
During Apple’s fiscal second quarter, iPhone sales climbed 1.5% to US$51.3 billion, despite a 13% decline in global smartphone shipments from January to March.
Research firm Canalys’ data revealed that Apple managed to capture market share from Android phones during this period.
Used iPhone contributes to strong growth
A key factor contributing to Apple’s market share growth in both emerging and developed markets is the burgeoning market for pre-owned iPhones.
Global sales of refurbished iPhones saw a 16% increase in volume during 2022, with India leading the surge at 19%, according to Counterpoint.
In India, iPhones represented 11% of secondary smartphone sales.
In a Thursday interview with Reuters, Apple CEO Tim Cook acknowledged that the company’s direct iPhone revenue from refurbished devices is minimal.
However, he emphasised Apple’s efforts to support the used iPhone market by offering trade-in deals and constructing durable devices that can serve multiple owners.
Cook stated in the interview, “We encourage the market, and it provides us an opportunity to hit some price points that we would not otherwise play in.”
Demand for iPhone remains solid despite multiple obstacles
The strong earnings came in despite concerns over how the economic uncertainty, high inflation and rising interest rates will hurt spending on non-essential expenses.
Investors were worried about the potential impact on Apple given the luxury status of their high-end products.
With an average iPhone price of US$988 last quarter, Apple’s record iPhone sales has been extraordinary given the current market challenges.
Apple’s active device base reaches all-time high, driving services growth
In classic Apple fashion, CEO Tim Cook mentioned the company’s all-time high installed base of active devices without disclosing specific figures.
This increase from last quarter’s two billion active devices fuels the continued growth in services revenue, which reached an all-time high of US$20.9 billion.
With growth coming from new markets in emerging markets, I am confident that services growth will remain sustainable.
Rewarding shareholders amid strong sales and cost discipline
Apple’s strong sales and cost management enable shareholder-friendly practices.
The board declared a cash dividend of US$0.24 per share, a 4% increase, marking the eleventh consecutive rise since 2012.
The impressive 153% increase in its dividend payout since inception, coupled with a 0.55% yield, showcases Apple’s commitment to shareholder returns.
Additionally, Apple’s board authorised a US$90 billion stock buyback, driven by robust operating cash flow of $28.6 billion, further benefiting investors.
Apple has a remarkable value despite its premium
Apple’s stock remains a compelling investment, trading at 28 times earnings compared to the S&P 500’s price-to-earnings (PE) ratio of 24.
Despite being slightly more expensive, Apple’s stock has seen a 929% increase over the past decade, with a total gain of 1,110% when factoring in dividends.
This outstanding performance, in contrast to the S&P’s 207% total return, highlights Apple’s well-deserved premium and its attractiveness at its current price.
Investors should invest in Apple for its resilient brand and remarkably strong ecosystem despite the slight premium required to buy its shares.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
