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2 Reasons Apple Stock Is a Buy

By Daniel Sparks – May 6, 2020 at 6:41AM

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The tech company's two most important catalysts continued to see their revenue surge higher during the quarter.

As expected, the coronavirus took a toll on Apple's (AAPL -3.00%) second quarter of fiscal 2020. The tech giant had initially guided for fiscal first-quarter revenue between $63 billion and $67 billion. But when the coronavirus led to production constraints and store closures in China during February, Apple told investors its revenue was expected to come in below its guidance range for the period -- and it did exactly that, coming in at $58.3 billion.

Nevertheless, the tech company's fiscal second-quarter results still managed to highlight why Apple stock is worth buying today, while shares are still trading well below pre-coronavirus levels.

A person connecting a band to an Apple Watch Series 5

Apple Watch Series 5. Image source: Apple.

Apple's 2 best catalysts are still powering higher

In an April 23 article, I argued that Apple shares were a buy. The main premise for this optimistic view was the momentum of the tech giant's two fastest-growing segments: services and wearables, home, and accessories. Services revenue grew 16% year over year in fiscal 2019 and wearables, home, and accessories revenue jumped 41% over the same timeframe. As these two segments continue to grow as a percentage of Apple's total sales, they'll help offset the company's dependence on iPhone and likely help Apple grow its total top and bottom lines in the years to come.

In Apple's second quarter of fiscal 2020, this thesis was reinforced, as both segments continued to see strong sales growth and as services' lucrative gross profit margin expanded even further.

A line chart showing Apple's revenue in services and wearables, home, and accessories by quarter

Data source: Apple's quarterly financial statements. Chart source: author.

1. Services

Apple's services business, which includes sales from the native and third-party apps in the App Store, iCloud, the App Store search ad business, Apple Care, and other services, saw revenue rose 17% year over year to an all-time quarterly record of $13.3 billion. Just as notable, services gross profit margin for the quarter was 65.4%, up both sequentially and year over year.

"We had strong performance across the board with all-time revenue records in the App Store, Apple Music, video, cloud services and our App Store search ad business," said Apple CFO Luca Maestri in the company's fiscal second-quarter earnings call. "And we also set a March quarter record for Apple Care."

Maestri also said that the company added 35 million paid subscribers sequentially across the services on its platform, bringing total paid subscribers to 515 million. This is the highest sequential growth the company has ever experienced.

2. Wearables, home, and accessories

Then there's Apple's wearables, home, and accessories segment, which saw revenue rise 23% year over year to $6.3 billion. Its wearables business, which includes sales of the Apple Watch, AirPods, and Beats products, is now the size of a Fortune 140 company, Maestri said.

A woman wearing Apple's AirPods Pro

AirPods Pro. Image source: Apple.

Bolstering the case for buying Apple stock

Investors can thank growth in services and wearables, home, and accessories for offsetting the decline in sales Apple saw in iPhone, Mac, and iPad during the quarter as COVID-19 negatively impacted supply and demand for much of the company's hardware business. Because of the strong double-digit growth seen in Apple's two fastest-growing segments, total revenue during the period was $58.3 billion, up from $58.0 billion in the year-ago period.

The two segments are becoming increasingly important to Apple's overall performance and will likely play an even greater role in sales growth in the future. Their combined sales accounted for 34% revenue in fiscal Q2, up from 29% of revenue in the year-ago quarter.

These two segments bolster the bull case for Apple stock over the long haul. The tech company's rapidly growing wearables business is diversifying the tech company's hardware revenue and setting it up for a likely return to growth post-COVID-19. Meanwhile, Apple's services business is turning Apple's base of 1.5 billion active devices into a growing, recurring revenue stream.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.

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