Apple Earnings Crush Expectations, Investors Shrug

Another quarter, another monster earnings report from tech giant Apple (NASDAQ: AAPL).apple-logo1-650x406-e1425908745423

Apple released fiscal fourth-quarter and full-year earnings after the market close on Tuesday and managed to beat analyst expectations on both the top and bottom lines.

Investors were initially pleased with the Apple earnings results and sent the stock 2% higher in early after-hours trading, before falling slightly lower. (As of this writing, shares are flat.)

Once again, Apple proved it is one of the strongest businesses on the planet, with a world-class brand and product portfolio.

Astonishing Growth

Apple’s quarterly and annual financial figures are almost difficult to believe. The company racked up $11.1 billion in net income for the quarter on $51.5 billion of revenue. Earnings clocked in at $1.96 per share. Apple’s quarterly revenue and earnings per share grew 22% and 38%, respectively, year-over-year.

The results beat the average analyst estimate, which called for $1.89 per share of earnings on $50.9 billion of revenue.

For the full fiscal year, Apple generated $233 billion of revenue and $9.22 in diluted earnings per share. Revenue and diluted EPS grew by 27% and 42%, respectively, year-over-year.

Apple generated $70 billion of free cash flow last year, meaning the company’s massive cash mountain continues to grow. At the end of the quarter, Apple held a combined $205 billion in cash, short-term marketable securities and long-term marketable securities.

IPhone, China Once Again the Key Drivers

Apple’s outstanding growth was once again led by its flagship iPhone device, which now accounts for approximately 62% of Apple’s total revenue. Apple sold 48 million iPhones last quarter, which was in line with analyst expectations, and up 22% year-over-year in terms of units sold.

Geographically, the key driver for Apple’s growth was China, which should not come as a surprise. China is a premier emerging-market nation with a population of 1 billion and a booming consumer class. Apple grew revenue in China by an astonishing 99% year-over-year.

Apple’s growth in China was by far the highest among its key geographic markets. The second fastest-growing region for the company is the rest of Asia Pacific, excluding Japan, where revenue grew 27% year-over-year.

Two Causes for Concern

While overall Apple’s report was outstanding, there were some pockets of weakness. Two issues in particular should concern investors: Apple’s falling iPad sales, and its slowing growth in developed nations.

On the first point, the iPad has gone through a prolonged period of falling revenue. In the full fiscal year, units of iPads sold fell 20%. This once again raises questions about whether Apple has suffered a self-inflicted wound.

When Apple released the iPhone 6, it came with a much larger screen than its predecessors. That decision was made in response to a clear trend among consumers, who demanded bigger screens. The iPhone 6 and 6s have clearly sold extremely well.

But the downside of the bigger phones is that consumers may feel less compelled to buy both an iPad and an iPhone. This has caused the iPhone to command an increasing proportion of Apple’s total revenue. In the same quarter last year, the iPhone represented 56% of Apple’s total sales. That figure has climbed six percentage points in one year. It may not be a great sign that Apple is so dependent on one product.

Furthermore, while Apple’s growth was outstanding in China, growth has slowed in the more developed nations. Apple realized just 2% revenue growth in Europe last quarter, 9% growth in Japan and 10% growth in the Americas. In the developed markets, the smartphone industry may be nearly saturated.

Apple Remains a Force to Be Reckoned With

There may be a bruise or two on Apple, but overall, its results are simply outstanding. The company is realizing massive growth, and it is aggressively returning cash to shareholders. Just last quarter, Apple returned $17 billion to investors in share repurchases and dividends.

Apple continues to post fantastic revenue and earnings growth, and yet its stock is up just 3% year-to-date. The good news is that the stock is cheap on a valuation basis. At $114 per share, shares trade for just 12 times trailing earnings per share. That is significantly cheaper than the broader market: the S&P 500 trades for closer to 19 times EPS.

As a result, while the market may not be too impressed with Apple’s outstanding results, investors have the opportunity to invest in this world-class company at a cheap valuation.

DISCLOSURE: Bob Ciura personally owns shares of Apple (NASDAQ: AAPL).

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