Apple Inc. (AAPL, Financial) announced financial results for its fiscal 2023 third quarter on Aug. 3, which were mostly positive. However, investors were concerned about the revenue decline, which was enough to send the shares nearly 5% lower the following day.
However, a quick look at the earnings report is enough for me to have a bullish outlook for the stock as I see a highly promising catalyst that can support both revenue growth and profitability in the coming quarters. On top of that, Apple has a wide economic moat and some other important growth factors that support my positive thesis.
Apple has reported a record for its growing services business
Overall, I do not find the sell-off justified as the numbers were good, beating expectations for both earnings per share and revenue.
The technology company reported earnings of $1.26 per share versus $1.19 estimated and revenue of $81.8 billion versus $81.69 billion estimated, down 1% year over year. However, investors did not like that sales of the company’s key products, the iPhone, Mac and iPad, declined from a year ago. Still, the gross margin of 44.50% was better than the 44.20% estimate. Further, Services revenue grew 8% to $21.21 billion and topped the $20.76 billion estimate.
I strongly believe Apple has discovered a hidden ace, the Services business, as its revenue reached a new all-time high and the installed base of active devices also set a record, reaching 2 billion.
The strong momentum in Services revenue growth is very important for two reasons. First, it can provide recurring income for Apple. Second, it mitigates the company’s revenue dependence on iPhone sales, which make up nearly 50% of the total revenue. The Apple Fitness+, Apple Card, Apple TV+ and Apple Music have a lot of revenue growth potential, while the app store is a never-ending creativity pool that can continue to generate recurring sales.
Economic moat supports higher profitability
An economic moat refers to the competitive advantages and barriers that protect a company's market share, profitability and sustainability over the long term. These advantages make it difficult for competitors to replicate or surpass its position in the market. Apple's economic moat is built on several key factors, such as brand strength, customer loyalty, its ecosystem, its supply chain and manufacturing efficiency and its strong financial position.
The company has established a powerful and recognizable brand that is associated with innovation, design excellence and premium quality. Its loyal customer base is willing to pay a premium for Apple products and services due to their trust in the brand and the positive experiences they have had with previous products.
Apple has created an integrated ecosystem of hardware, software and services that work seamlessly together. This ecosystem creates a sense of convenience and compatibility for users, making it more likely for them to stick with Apple products across different product categories. For example, customers who own an iPhone are more likely to purchase a Mac computer or an iPad to ensure compatibility with their existing devices.
The company's history of innovation has led to the development of groundbreaking products like the iPhone, iPad and MacBook. The company invests heavily in research and development, resulting in a strong portfolio of patents and proprietary technology. These innovations not only differentiate Apple's products, but also make it challenging for competitors to replicate the same level of functionality and user experience.
Apple has developed a sophisticated and efficient supply chain management system. The company's ability to manage suppliers, control costs and maintain high-quality manufacturing processes gives it a competitive advantage in terms of economies of scale and production efficiency. Its distinctive retail stores provide a unique shopping experience that showcases the company's products in an interactive and customer-friendly environment.
This direct retail presence allows Apple to control the presentation of its products and provide exceptional customer service, enhancing brand loyalty. Its substantial financial resources, including cash reserves and a robust balance sheet, provide the company with the flexibility to invest in research and development, pursue strategic acquisitions and weather economic downturns.
Its products also have a global presence, allowing the company to tap into a diverse and expansive customer base. This wide reach helps Apple mitigate risks associated with regional economic fluctuations and changes in consumer preferences.
Future growth catalysts
In addition to the Services revenue growth, other key growth catalysts include new product launches, expansion into new markets, increased investment in research and development and, in artificial intelligence, the growth of the wearables and cloud computing markets.
Having invested heavily in research and development, Apple is expected to launch several new products in the coming years that could drive sales growth and boost its bottom line. The company is also expanding into new markets, such as China and India, that offer significant growth potential as well.
Wearable devices, such as smartwatches and fitness trackers, are becoming increasingly popular. Apple is a major player in this space, meaning it will likely benefit from future growth.
Cloud computing is also becoming increasingly popular as businesses and individuals look to store and access their data online. Apple offers a variety of cloud services, so the company could benefit from the growth of this market as well as AI and machine learning, which are becoming increasingly important to the technology industry.
However, some risks could affect Apple's future growth, including increased competition and changing consumer preferences. As such, the company needs to be able to adapt its products and services to meet these changes.
Conclusion
Apple has found a smart and very effective way to support its revenue other than sales of the iPhone and has a series of positive factors ahead that make me confident that high profitability and strong financial performance can continue. Next month, the company will announce its new series of iPhones, which should boost sales.
