Meta Platforms and Amazon Surged Last Week, Apple Stock Fell. My Top Pick of the 3 to Buy Now.

Last week featured a slew of banner earnings reports. But the wildest day by far was Feb. 1, when Apple (AAPL 1.77%), Meta Platforms, and Amazon all reported earnings.

The following day, Meta surged to an all-time high and Amazon blasted to a two-year high within striking distance of an all-time high. Apple, however, slipped, becoming the second-worst-performing "Magnificent Seven" stock year to date behind Tesla. All told, Meta soared 20.5% last week, Amazon gained 8%, and Apple lost 3.4%.

Still, I'd rather buy Apple than Meta or Amazon right now. Here's why I believe the consumer tech giant has what it takes to compound over time.

Image source: Getty Images.

A record quarter but far from perfect

For its fiscal 2024's first quarter (ended Dec. 31, 2023), Apple reported all-time-high diluted earnings per share of $2.18, up 16% from the year-ago period. Product revenue was up less than 0.1%, but services revenue rose 11.3%, so total sales gained 2.1%.

Apple estimated that product supply constraints and one less week in this quarter, versus the same quarter last year, resulted in 2 percentage points of lower revenue. Still, 4% revenue growth isn't impressive. 

Data source: Apple. Chart by author.

The glaring red flag in Apple's report was China. Revenue from the iPhone set all-time records in Latin America, Western Europe, the Middle East, and South Korea, along with India and Indonesia. But that growth was weighed down by nearly 13% lower sales in China.

Here's where the math gets interesting. If you take out China, sales for fiscal 2024's first quarter would have been up 5.9% from the year-ago period. If you also add in the additional 2 percentage points of sales headwind that Apple estimated because there was one additional week in the same quarter last year, revenue growth would have been 7.9%.

That's far more reasonable than the 2.1% face-value figure. Of course, taking out Apple's third-largest region and second-largest country is a bit of a stretch. But if you believe that China will recover and that growth in emerging markets is sticky, Apple's results are far better than they look at first glance.

Quarterly highlights

Apple did an excellent job of managing costs and growing margins. Despite less than 0.1% in product sales growth, product cost of sales fell by over $2.3 billion. Overall, the gross margin improved to 45.6%, compared to 43% in fiscal 2023's first quarter. This marked an all-time high and showcased why the growth of services is turning Apple into even more of a cash cow.

In the earnings call, Apple touted its record performance in services and iPhone sales growth across many new markets. The company also reinforced its sustainability goals by offering carbon-neutral Apple Watches and other efforts to progress toward its 2030 net-zero carbon goal.

The tech giant's installed base of Apple devices reached an all-time high of 2.2 billion. The company also reported a record number of iPhone upgrades in the quarter. Apple now has over 1 billion paid subscriptions across its services, more than double the number four years ago.

Critics who point to Apple's slowing growth should note that Apple stock is up just 7% over the last two years. Yet today, it's a far higher-margin, higher-quality business than just two years ago. The growth may not be there, but the reasons for the slowdown are understandable. And the strength from services gives Apple plenty of momentum to boost its margins even further in the years to come.

Muted guidance from management

Apple is guiding for a gross margin of 46% to 47% in the second quarter. It's also guiding for a double-digit services revenue growth.

Note that a year ago, Apple's fiscal 2023 second quarter benefited from alleviated supply chain constraints that led to higher inventory and the fulfillment of pent-up demand. The quarter was, in many ways, an artificially solid quarter. In fact, Apple estimates that the tailwind added around $5 billion in revenue to the quarter last year.

The company expects its iPhone revenue and total company revenue for the latest quarter to be similar to the year-ago quarter but without that tailwind. Apple is essentially saying it expects fiscal 2024's Q2 revenue to be $89.8 billion -- down from $94.8 billion a year ago.

A powerhouse capital return program

Apple made $20.1 billion in buybacks, compared to $19.5 billion in fiscal 2023's first quarter. It also paid $3.8 billion in dividends, just slightly more than a year ago. Yes, you read that correctly: Apple's buyback program is over five times bigger than its dividend program.

For context, if Apple used the money it was paying in buybacks on the dividend instead, the company would have paid $1.26 per share in dividends this quarter -- good for a forward yield of 2.8%. This exercise shows the sheer size of Apple's capital return program and why looking at the dividend without the context of buybacks is a big mistake.

Buybacks have been a better use of capital than dividends. Buying back stock in a quality company is a good use of capital if the stock price goes up. But it also has immediate benefits by reducing the outstanding share count and, therefore, boosting earnings per share since there are fewer shares to go around.

In this vein, Apple's buybacks are a way to boost earnings-per-share growth, even when organic growth is stagnating. It's another lever that Apple routinely pulls on to make it a worthwhile long-term investment.

Apple is a good value

Overall, Apple's quarter and guidance weren't that great so understandably, investors with short-term time horizons could be running for the exits. But Apple's long-term investment thesis has arguably gotten even stronger. And for that reason, Apple is worth buying now.