Just when nearly everyone had thrown in the towel, Apple (NASDAQ: AAPL) proved it can still surprise us.
Apple earnings beat analyst expectations for the fiscal third-quarter, the company reported on Tuesday. Some of this was due to the benefit of low expectations; Apple is currently in-between major new releases of its flagship iPhone.
In the Apple earnings report, the tech behemoth did see strong results across some of its other platforms, including its rapidly-growing services business. And, the iPhone SE sold better than most had anticipated, thanks to a new outreach in emerging markets like India.
Apple shares bounced on the news, but at $103 still remain well below its high of $135 last year. That being said, because the company has a host of future growth catalysts to look forward to, investors should continue to hold on.
Apple Earnings: Strong iPhone Sales
For last quarter, Apple reported earnings of $1.42 per share and revenue of $42.4 billion. While these figures represented declines on a year-over-year basis, the results were nevertheless ahead of analyst expectations, which called for $1.38 per share and $42.09 billion of revenue. Of critical importance is that iPhone shipments came in ahead of forecasts: Apple sold 40.4 million iPhones last quarter, which was significantly more than the 40.02 million projected.
On the ensuing conference call, Apple CEO Tim Cook indicated that the strong iPhone sales number last quarter was due in large part to the success of the iPhone SE. Investors may recall this is the lower-cost iPhone model that Apple released in March. It sells for $399 for the 16GB model, which is far less than the price of a traditional iPhone.
Cook stated that initial sales data indicates the iPhone SE is popular in both developed and emerging markets, and that the rate of iPhone SE sales to customers who are new to the iPhone is at a higher level than previously released iPhone models.
What this means is that the iPhone SE is doing what Apple wanted it to do: to increase the company’s market share in developing countries. When Apple released the phone, it was widely panned by analysts for threatening to erode Apple’s high profit margins. Apple’s point all along was that, while it indeed did cause margin erosion, it meaningfully increases overall sales and profits for the company. This growth will be seen not just in terms of device sales and profits, but also in terms of software sales.
This is evident by last quarter’s impressive performance of Apple’s services business, which grew 19% in the quarter. The App Store had its best quarterly performance ever, generating record sales.
Going forward, this will continue to boost Apple’s revenue and profits, because the company currently has just 2% market share in India, a rapidly-developing economy with a population of 1 billion. Thanks to the iPhone SE and the related benefits of Apple’s ecosystem, there is a good chance the company will beat expectations in future quarters.
Apple Shares Are Still Cheap
The bottom line for investors is that Apple is still worth buying today. Even though the stock has come off its lows of $90 seen earlier this year, the stock is still incredibly cheap. Analysts currently expect Apple earnings at $8.28 per share this fiscal year, meaning the stock trades for just 12.5 times earnings. Next fiscal year, analysts on average expect Apple to grow EPS by 7.5%, to $8.90 per share. From that perspective, Apple stock is valued at 11 times forward EPS estimates.
These valuation levels are significantly below the S&P 500 averages. In addition, Apple offers a 2.2% dividend yield, which is also above the S&P 500 yield, and the company has vowed to increase its dividend by 10% per year going forward.
With the impending release of the iPhone 7, along with new iterations of the iPad and continued growth of the App Store, Apple stock remains an attractive buy.
Disclosure: The author is personally long AAPL.