2022 has been a challenging year for investors, for consumers, and for corporations. There has been some variation in the challenges each face, but all of them have had to deal with supply chain disruptions, rising interest rates, and inflated costs. Even the largest, most disruptive companies have had to deal with these variables in some form.
A big part of the challenge for companies is accurately gauging how the effects of inflation and rising interest rates will impact consumer spending and purchasing power. Apple (AAPL 1.46%), which generates much of its revenue from its premium-priced hardware devices, appears vulnerable to this systemic risk. But the company's most recent earnings report suggests the tech giant is managing the turbulence just fine. Let's dig into Apple's report and see if we can determine what it's doing right and explain why the company looks to be a good long-term buy.
Inflation doesn't seem to be slowing Apple down
The Federal Reserve has been working to combat the highest inflation the U.S. has seen in nearly four decades. There are textbook methods for getting inflation under control but investors need to understand that there are only so many levers the Fed can pull without creating new, potentially worse problems. In such a challenging economic environment, it is natural to think that companies like Apple, which primarily sells luxury consumer hardware, could struggle.
For the company's fiscal 2022 third quarter (ended June 25), Apple reported $82.9 billion in revenue, up 2% year over year. While this growth seems unimpressive, it's important to note where the company is seeing the most growth. The tables below break down Apple's revenue for the three months and nine months ended June 25, 2022, across product segments and geographies.
| Net Sales by Region | Q3 2022 | Q3 2021 | Q1-Q3 2022 | Q1-Q3 2021 |
|---|---|---|---|---|
| Americas | $37.47 billion | $35.87 billion | $129.85 billion | $116.49 billion |
| Europe | $19.29 billion | $18.94 billion | $72.32 billion | $68.51 billion |
| Greater China | $14.6 billion | $14.76 billion | $58.73 billion | $53.8 billion |
| Japan | $5.45 billion | $6.46 billion | $20.28 billion | $22.49 billion |
| Rest of Asia Pacific | $6.15 billion | $45.4 billion | $23 billion | $21.16 billion |
Source: Apple. Note: Q3 in 2022 ended June 25 and Q3 in 2021 ended June 26.
| Net Sales by Product | Q3 2022 | Q3 2021 | Q1-Q3 2022 | Q1-Q3 2021 |
|---|---|---|---|---|
| iPhone | $40.67 billion | $39.57 billion | $162.86 billion | $153.11 billion |
| Mac | $7.38 billion | $8.24 billion | $28.67 billion | $26.01 billion |
| iPad | $7.22 billion | $7.39 billion | $22.12 billion | $23.61 billion |
| Wearables | $8.08 billion | $8.78 billion | $31.59 billion | $29.58 billion |
| Services | $19.6 billion | $17.49 billion | $58.94 billion | $50.15 billion |
Source: Apple. Note: Q3 in 2022 ended June 25 and Q3 in 2021 ended June 26.
Apple is generating robust growth across nearly all of its revenue streams, with iPhone and Services leading the charge. It's no secret that the iPhone is an expensive product, selling for more than $1,000 depending on which specs you purchase. However, through the first nine months of fiscal 2022, Apple's revenue from the iPhone is $162.9 billion, up 6% year over year. This level of growth at this magnitude showcases that Apple's decisions to release newer, premium-priced versions of the iPhone in tandem with lower-cost options such as the iPhone SE has been working. Perhaps even more encouraging is that despite elevated levels of inflation, consumers still appear to be buying higher-end products around the globe.
Moreover, the strength in iPhone sales has catapulted Services revenue, which is up 18% through the first nine months of fiscal 2022. Services revenue is derived from advertising, cloud services, and in-app purchases. When more iPhones are being purchased, Services revenue should increase as well thanks to additional spending items such as cloud storage and mobile apps.
This circularity is what makes Apple so attractive as an investment. The tight ecosystem around its products and services has helped fuel the company's growth and build a strong market position even in uncertain times.
Image source: Getty Images.
Apple's balance sheet gives it plenty of options
Apple's top line has powered past fears around consumer purchasing power, but investors should also take a look at the company's profitability profile. In Q3, Apple's net income was $19.4 billion, a decline from Q3 2021's net income of $21.7 billion. But for the first nine months of the fiscal year, Apple's profits of $79.1 billion are up nearly 7%. So headwinds are increasing, but Apple is still progressing.
Given this level of profit, Apple amassed a whopping $27.5 billion of cash on its balance sheet. The company is using some of this cash to reward shareholders in the form of a quarterly dividend of $0.23 per share. When combining its cash, cash equivalents, and marketable securities, it has a $179.3 billion war chest available to use.
Additionally, the company is rumored to be releasing a virtual reality headset sometime in 2023. I note this to point out that Apple has the financial flexibility to invest in innovative new products as well as reward shareholders even during times of economic volatility, all the while keeping strong levels of cash and liquidity on hand.
Does Apple's valuation affect any buy decision?
Apple's stock price is down about 6.1% year to date and is trading at 7.1 times trailing-12-month sales. By comparison, big-tech counterpart Microsoft, which also derives the majority of its sales from a combination of hardware and software services, trades at 10.5 times trailing-12-month sales. While Microsoft and Apple each have a unique position in the marketplace, Apple does appear less expensive when analyzing certain valuation metrics.
It is important to understand, though, that Apple has a $2.7 trillion market capitalization and is on its way to $3 trillion, which would be a historical market feat. While Apple is certainly not a cheap stock, its stock price looks reasonable compared to market cohorts and its proven track record. Now looks like a great time to buy and hold Apple stock for the long run, before the markets begin to turn around.
