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All the Things That Made Apple Pop Higher on Earnings

By Motley Fool Staff - May 8, 2018 at 12:26PM

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There was something for everyone to like in the tech titan’s first-quarter report.

In this segment of the MarketFoolery podcast, host Mac Greer is joined by Motley Fool analysts Andy Cross and Aaron Bush to dissect the latest results and news from the world's biggest tech company. Among the highlights: It sold 52.2 million iPhones, is buying back another $100 billion in stock, and is raising its dividend. The guys talk about the earnings numbers, the sales trends around the iPhone, and what the company expects will drive its growth.

A full transcript follows the video.

This video was recorded on May 2, 2018.

Mac Greer: Shares of Apple (AAPL 0.63%) up around 4% at the time of our taping. Apple reporting earnings after the market closed yesterday. Guys, here are some highlights. 52.2 million iPhones sold for the quarter, and that was actually slightly below expectations. Just let that sink in. Slightly disappointing. Apple also announced that it's buying back $100 billion in stock, and they're raising their dividend. Andy, what caught your attention?

Andy Cross: That iPhone number, Mac, it was slightly less than what analysts had been expecting by like, I don't know, 50,000 phones or something. It was almost ridiculous to think about how much they may have missed. The numbers that they put up this quarter are staggering. Sales up 16%, earnings per share up 30%. Their Service revenues were up 31% and now make up 15% of the total, so, $9.2 billion, that's the Services. Wearable revenues were up 50% as well. Even those iPhone sales, the numbers you mentioned, Mac, iPhone sales for the first half of year were $100 billion, and that was up 14%. And their average order, because of the iPhone X, went to $728 from $655.

But, the buyback, what investors are getting. Everyone is getting a little bit in this earnings quarter, but the investors, like you mentioned, another $100 billion, that's on top of a $200 billion buyback they've already made since 2013. There are only 75 companies that, their entire market cap is greater than $100 billion, and Apple is buying back another $100 billion worth of stock.

Aaron Bush: Pocket change. I think what made this quarter really stand out was the fact that, they only sold about 3% more iPhones, but through the iPhone X, they were able to significantly raise prices. And I think that's also a reason to continue to be optimistic, because that's something that will continue over time. Right now, Apple is in this period where it's not really about selling devices to more people as much. It's about using the 1.3 billion active devices already out there, and all the people who use that, and to figure out how to sell them more services, sell them the smartwatch or the AirPods and make the sales per active customer, essentially, go up. Right, now, I think it's about $30 if you take out the actual hardware costs. But I have a feeling that's going to go higher from here.

Greer: Do you think they've hit a limit in what they can charge for the iPhone? Because, the average selling price of an iPhone for this last quarter was around $728.

Cross: No, I don't think so. Even in China, the iPhone X was a monster success, and there's tons of competition in China. So, they're seeing success there. There were a lot of doubts going into the quarter that the iPhone, Aaron mentioned, the numbers were only up about 3%, and there were expectations they'd be maybe a little bit higher. So, I think there's some concern that maybe they're topping out that upper market, but I don't think so. Just think about what they're building with the ecosystem that Aaron mentioned. I think there still is room for them to continue to push that level. They also have to recognize that the competition is definitely out there, especially from the competitors coming from China.

Greer: Guys, we talked about the share buyback. We all know that companies notoriously are bad at timing their share buybacks. As an investor, how should I feel about Apple buying back $100 billion in stock?

Bush: I think, for Apple, this is something they do all the time now anyway.

Greer: That's a big number. [laughs]

Bush: It's a huge number. But, I don't know if it's as much a matter of timing and it's just as much like, this is more the Apple status quo. I do think that, at a point, when this is what you're doing with all of your cash, you do have to question whether the company is buying back tons of stock when it doesn't have better things to do. So, maybe, timing-wise, it could be a problem. But I think overall, it's a pretty tremendous move.

Cross: That's a good point. The stock, for Apple, at a $900 billion market cap, the company, there's a lot of value characteristics in this business now, and they have $267 billion of cash on the balance sheet that they will be able to deploy when they start bringing a lot of it back from overseas, plus the dividend. So, I think the expectations are that they will continue to have these monstrous -- I mean, they bought back 25% of the company over the last few years. So, if they can do that, especially at opportune times, which they have done in the past few years, when the stock was at less than $100 a share, I think investors will recognize that. But, investors also have to understand, that's the kind of company that Apple is now.

Greer: OK. Going forward, what's your biggest question, or, what's one thing you're looking at with Apple going forward?

Cross: The Services business, I mean, how big can that be? It's 15% of revenues right now. It was a great quarter for them, up 30-31%. There's really a lot of lock-in recurring revenue with that business, so I want to see how large that can get.

Bush: I'd scope it out slightly larger and say revenue per customer, which could include Services, but also would include other devices. Just, how much can they squeeze out of the people that they already have?

Aaron Bush owns shares of Apple. Andy Cross has no position in any of the stocks mentioned. Mac Greer owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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