Apple proves it can still deliver profits despite slower iPhone demand

Andrew Burton/Getty
  • Apple reported an earnings beat despite weaker-than-expected iPhone sales.
  • Some analysts believe that its strong services, revenue from other products, and potential for capital return helped offset iPhone numbers.
  • Watch Apple’s stock price in real time here.

Even though Apple sold fewer iPhones than it anticipated for the holiday quarter, the company blew past Wall Street estimates in its Q1 earnings report. And analysts noted that there were other factors at play besides the high cost of the new iPhone X that helped Apple’s success.

Apple’s strong growth in services, revenues from other devices, and its capital return to investors signal that the company can look past a weaker quarter of iPhone sales – which is still seen as Apple’s most prominent driver of revenue growth – and still deliver profits.

The initial belief around Wall Street was that the iPhone X would draw first-time users and people looking to upgrade their phones, but Apple’s December quarter earnings results showed that was not the case, Oppenheimer analyst Andrew Uerkwitz said.

Apple’s earnings slipped 2.74% to $US163.19 a share on the Friday morning after earnings.

Uerkwitz believes the iPhone’s higher price tag will be “harder to justify,” leading consumers to delay upgrading their phones. Apple said that its iPhones had a higher average selling price (ASP) of nearly $US800 this quarter, or $US100 higher than last year due to the higher-priced iPhone X, which sells at $US999.

While the higher price may have helped revenue growth, Apple CEO Tim Cook parried questions about how many people were switching from Android phones to iPhones during an earnings call, a figure that it usually discloses.

“The Apple investment thesis has shifted from one of product-led growth to predictable cash generation and shareholder returns,” Uerkwitz said.

Despite the iPhone’s slower sales, investors can still be pleased by the large amount of cash that the company is sitting on. Apple said it plans to reduce its net cash position of $US163 billion to “approximately zero,” which means shareholders could potentially see some or all of that money returned to them in the form of dividends or buybacks. “Apple’s cash pile makes downside risk very limited,” Uerkwitz added.

Analysts also believe the company has much more to offer than just its iPhones.

A figure that several analysts pointed out was the company’s service sales, which grew to $US8.5 billion, up 18.1% year-over-year.

“Services is becoming an even more important element of the Apple story, contributing over 30% of gross profit by the end of 2021 allowing for total company revenue and EPS growth even without device revenue growth beyond FY19,” Katy Huberty, a Morgan Stanley Analyst wrote in a note.

There was also an acceleration of sales from Apple’s other devices, such as the Apple Watch and AirPod wireless earbuds. Revenues from those devices grew 36% year-over-year, according to the company’s earnings report.

Other analysts maintained that Apple’s computing ecosystem will continue to drive the company’s upside.

“We believe AAPL’s true differentiation is its unique computing ecosystem: iOS. iOS provides users with an integrated, scalable, and seamless experience across multiple devices, which we believe will be difficult for competitors to replicate in scale,” Amit Daryanani, an analyst at RBC Capital Markets, said.

RBC raised its price target to $US205 from $US200 and rated it “Outperform.” Morgan Stanley rose its price target slightly to $US203 from Apple’s current share price. Oppenheimer rated the company as “Perform.”

Apple’s stock was down 5.18% for the year.

Read more about which tech giant dominated the others this earnings season.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.