Image source: Getty Images
Despite total sales reaching record levels, i an apple (NASDAQ:AAPL) stock fell 2% after the company’s Q3 earnings report. Should investors be worried?
I do not think so. Although a 35% drop in revenue seems alarming, I think the business is in a very strong position.
News headlines
A feature of Apple’s recent reports has been strong revenue growth from its Services division. Since these have higher margins, the result is a net profit that grows faster than sales.
Part of that trend continued in Q3 – Services revenue grew 12%, compared to 4% growth in the Products segment. But this did not translate into higher income.
While operating profit rose by around 10%, revenue fell by 35%. This is due to a $10bn tax payment made by the company to settle a lawsuit that began in 2016.
This looks like a one-time expense rather than an ongoing expense. But investors should watch out for Apple’s apparent appeal to regulators in the EU and elsewhere.
Highlights
A few months ago, there was a big question about how successful the launch of the new iPhone would be. And I thought there was a lot of pessimism around it.
The iPhone 16 is the first Artificial Intelligence (AI) offering from Apple. And some analysts have taken the view that the new features will not be enough to generate significant interest.
Apple’s Products division has low margins. But a large installed base of devices is key to generating solid revenue from the lucrative Service segment of the business.
With that in mind, I think the 5.5% growth in iPhone revenue was a significant highlight. And it shows the company’s competitive position is as strong as ever.
Outlook
Overall revenue growth for Q3 came in at around 6%. That may not sound like much, but the company’s sales have grown rapidly over the past few years.
Apple’s revenue growth for September 2022-June 2024
Created in TradingView
CEO Tim Cook had predicted something very similar in the last quarter of 2023. The hope is that some new features of Apple Intelligence can keep the growth story going.
For obvious reasons, the December quarter is generally strong for Apple products. So it will be interesting to see what the next set of results brings in terms of record sales.
Shareholders should know by now that not all income growth is the same. If Q4 growth is driven by the Services division, profits could reach more than 6%.
Why is the stock falling?
Apple’s report wasn’t all good news. Investors wouldn’t be happy to see that $10bn tax hit and the company’s continued position in China.
Overall, I thought the review was pretty good. Record sales and strong growth are signs that the company’s position is still strong.
Source link
