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4 Things Investors May Have Overlooked in Apple Inc.’s Recent Earnings

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Apple (NASDAQ: AAPL  ) investors are a fickle bunch. We expect strong earnings and revenue growth all the time. We also expect huge advances in technology that no one else thought of. Oh, and if Apple could just give us all of the money it has on the balance sheet, that would be great, too. The company's last earnings report didn't look that inspiring on the surface, but there are at least four things that suggest Apple's business will improve in the future.

The biggest challenge facing the company is being solved
Pretty much everyone knows that the iPhone is Apple's most important product. With the iPhone representing 56% of the company's revenue, investors have every right to be ultra-critical of results.

Whether it's competition from Google's (NASDAQ: GOOGL  ) Android smartphone army, or newer entrants like the high-megapixel cameras on the newest Nokia Windows smartphones, Apple has no shortage of competition. The fact that Microsoft (NASDAQ: MSFT  ) is in the process of acquiring the Nokia handset business, suggests that the company's $56 billion cash hoard may be about to seriously threaten both Apple and Google's smartphone dominance.

That being said, Apple's iPhone sales increased by 6% on a year-over-year basis, and many investors were disappointed. However, a little perspective is needed. First, this 6% increase was on top of a 28% increase the prior year. Second, and maybe most important, revenue per iPhone improved.

In fact, the company generated $637 in revenue per unit, which was the second highest per-unit figure since the iPhone 5 was introduced. In addition, this represented a 10% increase in revenue per unit over the third quarter. This gives us the first item investors may have overlooked, the gross-margin killing Apple has taken from the iPhone may be stabilizing.

About to pad its results?
The second thing investors may have overlooked is that Apple's iPad business seems to be finding stable pricing ground as well. With Android tablets like the Google Nexus 7 selling for just $229 and Microsoft offering deep discounts on the first-generation Surface for $299, one might wonder how Apple's iPad business could keep up.

Apparently, customers see the value in the iPad and the Apple ecosystem. This division reported a better-than-13% increase in units sold in the current quarter. While revenue on these units only increased by 7%, the story here is similar to the iPhone.

With the introduction of the first generation of iPad Mini at $299, it makes perfect sense that some customers would choose this cheaper option. This is part of why Apple's revenue per iPad dropped from $467 last year to $440 this year. However, this $440 per-unit performance was very close to the $439 per-unit performance of the third quarter.

With the new iPad Mini with Retina display priced at $399, this should help pad Apple's results, as some consumers will choose this device rather than the cheaper iPad Mini first generation. With Apple continuing to make the full-sized iPad lighter and faster at the same $499 price point, it seems the iPad's unit pricing is finding its footing as well.

Tune into this
The third thing investors might have missed in Apple's recent results is the continued strength of Apple's iTunes business. This division represents nearly 8% of revenue and grew by 19% on a year-over-year basis. While Google's "other" business, which includes Google Play, grew revenue by nearly 100%, iTunes generates nearly four times the revenue of Google's "other" division.

Microsoft, on the other hand, has yet to divulge much about its Windows App Store. By most accounts, the main thing customers know about Windows Apps is there are far less than on iOS or Android.

Hand over fist
The fourth item investors may have missed is that Apple's massive jump in net cash and investments in just the last three months. The company reported more than $12 billion in additional net cash in the current quarter compared to its last earnings report.

While Google grew its net cash and investments by 25% on a year-over-year basis, Apple grew net cash and investments by 9% in just one quarter. The fact that Apple has more than twice the net cash and investments compared to Google makes this comparison astounding. Even more unbelievable is, Microsoft has a gross margin that is nearly double Apple's, yet the company's net cash and investments actually declined by about 2% year over year.

The bottom line is Apple's two most important products are finding stable pricing. When you combine this with the strength of iTunes, huge cash generation, and furious share repurchases, Apple's business is actually doing better than some might think.

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Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2014, at 6:53 PM, JokerJoey wrote:

    Kudos to the Fool for publishing this article which explains why Apple is the absolute best place to be invested if you want to see some significant growth and dividend revenue!

  • Report this Comment On February 18, 2014, at 8:34 PM, SimchaStein wrote:

    Thanks. Hats off for highlighting the iPad success. This is lower margin than the iPhone. Apple wisely pushes hard on this line, the heir of the Post-PC paradigm.

    Adding one more point investors may have missed, CFO Oppenheimer said that they lost some of the top line due to currency fluctuations. (I think it was vs. the Yen.)

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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