Apple Inc. (AAPL, Financial) is considered by many to be the king of tech with a market capitalization close to $3 trillion. The business recently announced its plans to enter the “metaverse” with its Vision Pro Headset.
According to Precedence data, the metaverse is forecasted to grow at a 44% compounded annual rate. As a result, Apple has a huge opportunity.
In this discussion, I will break down its latest quarterly results before taking a closer look at a few catalysts. Let’s dive in.
Mixed financial results
Apple reported mixed financial results for the fiscal third quarter of 2023. Its revenue of $81.8 billion declined 1.4% year over year and missed analysts' forecasts by approximately $3 million.
The results were driven mostly by a 2% year-over-year decline in iPhone revenue to $39.7 billion, which contributes to 48% of total revenue. On a constant currency basis, however, iPhone sales actually grew as the company reported new records in India, Latin America, the Middle East and Africa.
The overall active user base of iPhones installed also grew to a new all-time high, which is a positive sign.
This is a surprising result given the latest iPhone 14 was criticized for being too similar to the iPhone 13. This led many to believe people would not upgrade. I believe this is true in some cases. However, given most people buy an iPhone on a contract, they will just naturally upgrade over time to the “latest” version even if there is not much of a difference in the technology.
The MacBook generated revenue of $6.8 billion, which declined 7% year over year. This was not a great result, but there is a cyclical pullback currently occurring in the computer industry as a whole. However, Chief Financial Officer Luca Maestri noted during the earnings call that “almost half” of MacBook buyers during the quarter were new to the product.
The company has also transitioned its entire lineup to its own Apple silicon chips. This should give the business more control over the design process and potentially increase margins due to vertical integration. The company revealed its M2 Pro in early 2023, it calls the “world's most powerful and efficient chip” for a Pro laptop. This includes 67 billion transistors, which is 10 billion more than the M1 Max and 3 times more than the M2. The result is a 40% faster image processing speed than the M1 Pro, which makes it ideal for applications such as advanced video editing and even the training of machine learning models.
As for iPads, the company generated revenue of $5.8 billion, which fell by 20% year over year. This may seem atrocious at first glance, but Apple said it was in line with expectations. This was because the iPad Air was launched in the prior year, which makes it difficult to compare quarters. Review websites such as The Verge give the iPad (2022) 8 out of 10 stars and state it is “significantly better” than previous models for both graphics and productivity-based tasks.
Moving on to wearables and home, the company reported revenue of $8.3 billion, which increased by 2% year over year. This was driven by a June quarter record in China. The Apple Watch also saw strong growth in new customers, with two-thirds of customers purchasing it.
Apple is not really considered a major player in the enterprise market (unlike Microsoft (MSFT, Financial)). However, it did score a deal with investment management firm Blackstone for a corporate iPhone and MacBook fleet.
Services is Apple's secret weapon
Most people think of Apple as a consumer products company, but I believe its Services business is actually its secret weapon. The business reported $21.2 billion in revenue, which increased by 8% sequentially and contributed to 26% of total sales. To put things into perspective, this is more than the iPad and MacBook revenue combined.
The results were driven by June records across its App Store, Apple Music and advertising. Apple notoriously takes 30% of all paid app downloads and in-app purchases, which is substantial.
The number of paid subscriptions reached a staggering 1 billion, up 150 million over the past 12 months and close to double the figure three years ago. Given Apple has an active installed base of 2 billion devices, its has plenty of runway to expand this offering.
It also announced record growth in a number of areas, from its AppleCare insurance to its iCloud and even payments (Apple Pay). The company even launched Apple Card, which has become one of the most successful credit card programs in the U.S.
In addition, Apple launched a new high-yield savings account, which has over $10 billion in deposits already.
AppleTV+ has also continued to be popular with over 54 Emmy Award nominations for its titles in July alone. The company is also using sports as a lever to boost engagement with its Major League Soccer season pass, which has proven to be popular.
Apple enters the metaverse
In June, Apple announced the launch of its Vision Pro augmented reality headset, which is expected to rival Meta Platforms’ (META, Financial) Oculus. Online reviewers who have tried the device indicate it is much better. The stats also indicate the device offers 4K resolution per eye, as opposed to 2K resolution offered by Meta’s headset. However, these higher specs come at a price, with Apple's headset estimated to cost a staggering $3,000 as opposed to Meta’s Oculus at $999. Apple's Vision Pro is expected to launch in early 2024.
Margins and balance sheet
Apple reported a solid 44.5% gross margin, up 20 basis points quarter over quarter. Its Services gross margin was a staggering 70.5%, much higher than its 35.4% product gross margin.
The company’s overall operating expenses were $13.4 billion, up close to 5% year over year. However, earnings per share of $1.26 topped estimates by 7 cents.
Apple has continued with huge buybacks. The company bought back 365 million shares, or $56.1 billion worth of stock, in the trailing nine months.
The company has a strong balance sheet with $62.4 billion in cash and short-term investments as well as $109.2 billion in total debt, of which the majority is long term.
Valuation
Apple trades with a price-sales ratio of 7.50, which is higher than its five-year average.
The stock also trades with a forward price-earnings ratio of 30, which is above its average for the same period.
The GF Value Line indicates a fair value of $173 per share, which means it is fairly valued currently based on its historical ratios, past financial performance and analysts' future earnings projections.
Final thoughts
Apple is a tech powerhouse that has continued to launch ground-breaking products. Its Vision Pro could be the next one of those as it is initially purchased by early adopters before becoming more mainstream. The stock is priced a little high at the time of writing, so investors may want to wait for a pullback.
