Apple's (AAPL -0.57%) share prices are down by 8.5% so far this year. Worries about consumer slowdown affecting iPhone demand, high revenue exposure to a struggling Chinese market, overreliance on Chinese labor for production, antitrust issues in Europe, supply chain disruptions, foreign exchange headwinds, and disruption of business in Russia have weighed on this stock.
However, shares seem to be picking up momentum after the company reported better-than-expected third-quarter results on July 28 for the period ending June 25. Is this recovery a knee-jerk reaction to the recent earnings performance or does it mark a reliable upturn in the company's stock price?
A quarter of resilient growth
Apple's third quarter revenue was $83 billion, up 2% year over year. Diluted earnings per share (EPS), on the other hand, fell year over year by 7.7% to $1.20. Despite slowing earnings growth, both revenue and EPS were firmly above Wall Street's estimates. The company has not given formal guidance for the next quarter or the rest of fiscal 2022, but expects supply constraints to tame and revenue growth to accelerate in the fourth quarter.
Many prominent analysts seem to be impressed with management's execution capability in the current precarious economic environment. Due to strong customer loyalty, the company's installed base of all active devices reached a record high in the third quarter. Apple is also seeing increased demand in the enterprise market, which could help to partially offset the impact of its consumer business's current weakness.
Robust demand for iPhone across geographies
Sales of Macs, iPads, and wearables were down year over year, while demand for Apple's flagship iPhone remained strong. Despite the possibility of an economic recession, third quarter iPhone sales rose year over year by 2.8% to $40.7 billion.
Although global adoption of 5G is still low, Apple continues to be a major beneficiary of the 5G upgrade cycle, thanks to robust ongoing demand for iPhone 13 models. The company has also reported impressive strength in emerging markets such as Brazil, Indonesia, Vietnam, and India -- geographies with very low iPhone penetration and significant scope for further growth. The expected launch of four new iPhone models in September 2022 could further boost demand in the near future.
Improving revenue and margin mix
In the third quarter, Apple's services business, which includes the App Store, Apple Music, Apple Pay, and iCloud Storage, was the fastest-growing segment. Revenue in this category was up year over year by 12% to $19.6 billion. The services business is benefiting from the company's rising focus on monetizing its loyal and highly engaged customer base. The company added 160 million paid subscription accounts in the last 12 months, which resulted in over 860 million paid subscription accounts at end of the third quarter.
Investors, however, are worried about the revenue performance of the services segment, which was lower than consensus analyst estimates of $19.7 billion. While the macro headwinds remain a challenge, this high-margin and recurring-revenue business is poised to be a major growth driver in the coming years.
Is Apple a good investment?
Apple's record-high level of installed device base is driving increased adoption of its services. The rising popularity of Apple services, in turn, fuels the demand for the company's devices. This virtuous cycle is a key positive for Apple in today's weak economic environment.
For fiscal 2022, analysts expect Apple's revenue to rise year over year by 7.6% to $393.44 billion and earnings per share (EPS) to increase by 0.5% to $6.13. While there is no doubt that Apple is suffering from macro headwinds, these estimates seem quite conservative. The company has a history of consistently surpassing its earnings estimates.
Apple is a richly valued at 26.4 times forward earnings. The company, however, is returning value to shareholders with dividends and share repurchases. In the third quarter itself, the company returned more than $28 billion to shareholders -- $3.8 billion as dividends and $21.7 billion as share repurchases. Apple also has a strong balance sheet -- with cash and marketable securities worth $179 billion and total debt of $120 billion.
Despite its premium valuation, Apple's loyal customer base and solid business proposition, and management's ability to execute under duress make it a great high-quality stock to buy now and hold for the long run.