Last week, Apple Inc. (AAPL, Financial) announced its latest financial report for its second quarter of fiscal 2023, which ended on April 1. The stock closed at $173.57 the following day, gaining 4.69% to trade near its 52-week high. Shares of Apple have gained nearly 34% year to date, despite the concerns for an economic recession amid tighter monetary policy by the U.S. Federal Reserve and the risk of the debt ceiling for the U.S. economy.
Overall, I believe there are many reasons for investors to be optimistic about Apple's future, and the recent earnings results help solidify my bullish thesis. The company has built a truly enviable and sustainable economic moat that it only keeps deepening with the addition of new products and services.
Second quarter earnings were driven by the iPhone
Apple had a very strong quarter as it reported a beat on earnings per share, revenue and gross margin. The EPS figure was $1.52 versus $1.43 expected, the revenue was $94.84 billion versus $92.96 billion expected and the gross margin was 44.3% compared to 44.1% expected.
Apple reported an all-time record in the Services segment, plus a March quarter record for iPhone sales. The iPhone revenue was $51.33 billion versus $48.84 billion expected, and this happened in a period during which smartphone demand appeared to have lost its momentum according to an IDC estimate that the smartphone industry shrunk about 15% for the same period.
Apple has announced an increase of 4% in its quarterly dividend to $0.24 per share and authorized a repurchase of up to $90 billion of the company's common stock. This news by itself is very optimistic about the stock price as the board of Apple may see the stock as undervalued.
Two important highlights to focus on are the dividend increase and the improvement in the total shareholders’ equity. Investors should pay attention to the equation "total assets = total liabilities and total shareholders’ equity" as it shows the net worth of the company.
Apple has been increasing its quarterly dividend for 11 years now. It's still far away from becoming a Dividend Aristocrat, but it's much better than the many tech companies offering no dividend.
Looking at the balance sheet, Apple reported total liabilities of $270 billion, lower than $302 billion for the period ending on Sept. 24, 2022.
The total shareholders’ equity increased to $62 billion compared to $50 billion a year ago. In other words, Apple has increased its net worth substantially, adding value to its investors.
Apple has a strong economic moat that continues to deliver
Apple has established a strong economic moat, which refers to its ability to maintain a competitive advantage and protect its market share and profitability over an extended period of time. The company has a plethora of factors that work together to create a very strong economic moat. In business, having a strong and sustainable economic moat means a competitive advantage that creates recurring economic value. Several factors contribute to Apple's economic moat.
Starting with a strong brand value and customer loyalty, Apple has built a powerful brand that is synonymous with quality, innovation and a superior user experience. The company has a dedicated customer base that is highly loyal and willing to pay a premium for Apple products. This brand value and customer loyalty provide Apple with a significant competitive advantage.
Then there is product differentiation as Apple's products are known for their design, ease of use and integration across its ecosystem. The company focuses on creating a seamless user experience by tightly integrating hardware, software and services. This integration, coupled with Apple's emphasis on aesthetics and user-friendly interfaces, sets its products apart from competitors and strengthens its economic moat.
Apple has developed an ecosystem of products, services and software platforms that are interconnected. Once customers invest in the Apple ecosystem, such as buying an iPhone, they are more likely to purchase additional Apple products and services due to compatibility and seamless integration. This ecosystem lock-in creates high switching costs for customers, making it challenging for them to switch to competing platforms.
The company also has a lot of supply chain and manufacturing expertise, investing in establishing robust global supply chain and manufacturing capabilities. The company's expertise in sourcing components, managing suppliers and controlling the manufacturing process gives it a competitive edge. Apple's scale and long-term relationships with suppliers also enable it to negotiate favorable terms, secure critical components and maintain a cost advantage.
Apple consistently invests in research and development to drive innovation and stay ahead of the competition. This ongoing investment allows Apple to introduce new products and technologies, expand its product portfolio and maintain a technological lead. By continuously enhancing its offerings, Apple reinforces its economic moat.
While Apple's economic moat is robust, it is worth noting that the technology landscape is dynamic and constantly evolving. Competitors can still pose challenges, and disruptive innovations could potentially impact Apple's position. However, I believe the factors mentioned above contribute to Apple's enduring competitive advantage and help fortify its economic moat.
