Is there more fuel left in Apple's (AAPL -0.74%) growth engine? Because the company has already delivered market-beating returns for years and is near the top of the exclusive group of trillion-dollar companies, some investors are wondering if it's time to cash in. Others still see signs that Apple isn't done growing just yet.
The Silicon Valley giant produced more evidence of its still-solid prospects when it released its latest quarterly update late last month. In it were clues that there are at least three reasons to think Apple isn't done growing yet and there is still time to get in on outsized returns. Let's take a look at those reasons.
1. Despite economic headwinds, Apple is managing to do well
Fears of a coming (or already present) recession are not unfounded, and inflation is eroding wage gains and savings. In a macroeconomic environment such as this, consumers tend to hold off spending on things they may want but don't need. That could easily describe many of Apple's products. A new smartphone is nice, as is a sleek pair of Bluetooth headphones. In reality, no one needs brand new versions of those things that often sell for well-above-average prices.
This would suggest Apple is going to have a rough go of it. And while these challenging headwinds have certainly impacted its earnings, the tech giant is managing surprisingly well. In its latest quarterly update (the third quarter of its fiscal year 2022, ending on June 25), Apple's net sales were up by about 2% year over year to $83 billion.
This modest top-line growth amid the issues Apple is battling is commendable. Apple's earnings per share did decrease to $1.20, down from the $1.30 reported during the year-ago period. Rising costs and expenses, partly due to inflation, may have played a role here. Still, overall, Apple's results were pretty solid. The company owed much of this success to its signature device, the iPhone.
2. Long live the iPhone
Apple's iPhone has been its major source of revenue for over a decade now. It arguably no longer generates the buzz it once did; the tech industry used to stop everything and listen every time Apple would announce a new version of its prized device. But demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.
According to CEO Tim Cook, "Looking at the data on iPhone for the June quarter, there's not obvious evidence in there that there's a macroeconomic headwind. I'm not saying that there's not one. I'm saying that the data doesn't show it where we can clearly see that in the Wearables, Home and Accessories area."
Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.
The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.
3. Margins are making a difference for Apple
A key advantage of Apple's services segment is its higher margins. Although the services segment is still far behind in sales, Apple has made a concerted effort over the years to improve its margins, and this unit has helped these initiatives. During its third quarter, Apple's products business recorded a gross margin of 34.5%, down 1.5 percentage points compared to the year-ago period.
However, the company's services segment saw its margins improve from 69.8% to 71.5%. That helped Apple's total gross margin remain flat year over year at 43.3%. Investors should look for Apple's margins to continue improving thanks to its services unit that is growing in importance.
Buy Apple and forget
Like the rest of the world, Apple is dealing with serious issues at the moment. But the company is not breaking under the weight of its (likely temporary) challenges -- not by a long shot. The customer loyalty it has built over the years is helping it grow sales, especially those of the iPhone. Apple boasts a valuable brand name that is second to none, be it in the technology sector or elsewhere.
Apple's services business is positively impacting the company's margins in a dynamic that will continue for many years. Overall, Apple still looks like an excellent long-term bet for patient investors. No wonder it is one of Warren Buffett's favorite stocks.