The stock market ended April deep in the red as earnings released last week were not good enough to revive the stock market.
In fact, the S&P 500 was down by 8.8% last month while the tech-heavy Nasdaq plunged by 13.3% during the month, making it the worst April in more than two decades.
Investors weighed the mixed earnings results and uncertain macroeconomic environment, which include the persistently high inflation environment, rising interest rates and supply chain disruptions.
The impact was also seen in Apple Inc (NASDAQ: AAPL), the world’s most valuable publicly-traded company with a market capitalisation of more than US$2 trillion.
At its current level, Apple has a market cap of US$2.7 trillion, which is still quite a distance from the US$3 trillion mark that it surpassed back in January this year.
However, I am convinced that investors should take advantage of its near-term headwinds and buy into Apple’s shares after its resilient earnings reported last week. Here are three reasons why.
1. Slowing growth but much better than expected
Apple reported an increase of 9% in its revenue to US$97.3 billion during the second quarter of its FY2022 (Q2 FY2022), better than the average estimate of US$93.9 billion.
Meanwhile, its Q2 FY2022 earnings per share (EPS) of US$1.52 also beat consensus estimates of US$1.43.
While revenue growth has moderated to below double-digit, and dropped from its all-time record of US$123.9 billon revenue recorded in the previous quarter, the earnings reflected Apple’s resilient business model.
Management has guided that the ongoing COVID-19 lockdowns in China would make a huge dent in Apple’s revenue for the April-June quarter with an indication of up toUS$8 billion in lost sales.
Apple CEO’s Tim Cook said in the earnings call last week that “we have estimated the constraints to be in the range of US$4 to US$8 billion and these constraints are primarily centred around the Shanghai corridor.”
While the lockdowns in China will have a negative impact on Apple’s earnings in the near term, it is worth taking note that demand for Apple’s products and services remained robust.
Sales for iPhones, Macs and wearables, home and accessories continued on a healthy growth trajectory during the recent quarter earnings.
2. Strong services revenue growth
Apple’s strong services revenue growth is another positive aspect for long-term investors as the company diversifies away from the reliance on its hardware business.
In the Q2 FY2022, Apple set an all-time record for its services revenue of US$19.8 billion, an increase of 17.3% from the same quarter a year ago.
The services revenue contribution to Apple’s total revenue also increased to 20.4% in the Q2 FY2022 as compared to 18.9% in Q2 FY2021.
This is important for Apple as it allows the company to generate recurring revenue streams from its services business.
The services revenue comes from services such as the AppStore, AppleCare, ApplePay, iCloud storage services and AppleCare warranties.
Apple has also introduced new subscription services such as Apple Music, Apple Arcade, Apple TV+ and the Apple Card, which compete with other financial payment players.
In the fall of 2020, the company also launched its Apple Fitness+, a fitness service powered by Apple Watch.
Currently, the AppStore contributes the majority of its services revenue but the growing subscription services offered by Apple is worth highlighting.
Paid subscriptions have continued to show strong growth with more than 825 million paid subscribers across services on Apple’s platform, which is up more than 165 million during the last 12 months.
3. Huge share buybacks and steady dividend growth
In the current environment, investing in growth stocks could be deemed as risky but Apple is more than just a growth stock.
Apple’s huge cash balance has allowed the company to reward shareholders via share repurchases and dividends.
Apple first initiated a large capital return programme in 2014 and has stuck with it since.
During the quarter, Apple’s board of directors declared a cash dividend of US$0.23 per share of the company’s common stock, representing an increase of 5%. This is the 10th consecutive annual dividend increase.
On top of that, the board has also authorised an increase of US$90 billion to the existing share repurchase programme.
If you zoom out, Apple has repurchased US$128.8 billion of stocks over the last six quarters.
Recent Apple sell-off is an opportunity to accumulate
The recent sell-off in Apple’s shares over concerns on its near-term earnings represents an opportunity for long-term investors to build up their holdings in Apple.
While the company is not cheap with a price-to-earnings (PE) ratio of 26 times, I believe the company’s brilliant strategy to diversify into services and its strong cash position put Apple in a different league.
Key risks remain with Apple’s exposure in China, especially given the rising geopolitical tensions between the US and China as well as the COVID-19 lockdowns in China.
However, the management has a strong track record in navigating through the fragile US-China relationship and has been able to maintain one of the best-managed supply chains in the world.
So, I believe long-term investors should take advantage of any price weakness to build up their position in Apple shares.
Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.
