Despite a potential decline in iPhone sales, Apple's earnings can still increase.

Despite a potential decline in iPhone sales, Apple's earnings can still increase.
Despite a potential decline in iPhone sales, Apple's earnings can still increase.
  • This earnings season, Alphabet, Microsoft, and Apple have experienced growth after experiencing declines in January.
  • Even if iPhone sales growth slows down, analysts predict that Apple can still achieve double-digit earnings per share growth in the past quarter.
  • During the pandemic, the services business has grown at a faster rate than hardware, contributing to Apple's multiple trillion-dollar valuations. According to Wall Street analysis, profits from services combined with buybacks can achieve a 10% earnings growth for the stock.
After Hours

Wall Street analysts believe that Apple can achieve double-digit profit growth without relying on its manufacturing-driven hardware business, such as iPhones, to grow.

Apple's services business, which generated $78 billion in revenue annually, is growing so rapidly that it can increase earnings per share by double digits annually, even if the growth in its iPhone business, which accounts for a larger portion of its revenue, slows down. Despite the slowdown in iPhone sales, Apple's profits increased by 20% in the first quarter of its fiscal year.

Despite any changes in the iPhone, the services margin remains a significant positive factor, according to Wedbush analyst Dan Ives. Since reporting, Tech stocks have experienced an upward trend, with Cook and Cupertino successfully stabilizing the market.

The numbers work like this.

The iPhone business accounts for approximately 70% of Apple's total product sales. In contrast, Mac computer sales experienced a 25% increase in the last quarter, despite being sold on a smaller scale. However, iPad sales declined. Services such as iTunes, Music, Apple Pay, and referral fees from Alphabet for directing Safari browser users to Google search engine account for 16% of sales but 26% of gross profit. Notably, the 24% growth in fourth-quarter sales of these services outpaced the 9.2% growth in iPhone sales, which was driven by the release of a new iPhone model and the migration of existing users to faster 5G technology.

The search giant's latest quarterly results, reported after the close on Tuesday, showed that traffic acquisition costs (TAC) came in higher than Wall Street expected at $13.43 billion.

Despite the fact that not every year brings a new iPhone with a groundbreaking innovation, analysts have been trying to determine the implications of the services growth for Apple's future. And they are optimistic about what they have found.

According to Sanford C. Bernstein's Toni Sacconaghi, Apple's capacity to attract new customers, increase market share, and offer new services indicates that a growth rate of 15%-20% in the next few years is not unrealistic. This development is significant, as it suggests that services (which account for more than 30% of gross profits and have the potential to grow by 20%) and buybacks (which result in an annual growth rate of 3%-4%) could drive earnings per share growth of 10% or more for Apple, even if Hardware/other products grow at a rate of 0%.

Other analysts say their math works out close to the same way.

According to Angelo Zino of CFRA Research, the services business can help Apple achieve high single-digit profit growth without increasing hardware sales. By implementing stock buybacks, the company can further support double-digit earnings per share growth by reducing the number of outstanding shares over which Apple's profit is spread.

Zino stated that margins in services will continue to expand. He added that 30% of Apple's company is services and wearables, and young kids and users are growing up on their platform. According to him, people aged 13 to 34 only want Apple products.

Apple has long aimed to shift its focus from manufacturing to services. This strategy not only stabilizes the company's earnings growth by reducing the impact of cyclical manufacturing fluctuations, as seen in the 30% decline in Apple stock in 2015-2016 due to slowing iPhone demand in China. Additionally, the move towards services increases the company's stock multiple, as software and internet services stocks typically command high price-to-earnings ratios.

During the December quarter, the number of paid accounts on our digital content stores increased by double digits and reached a new all-time high in every geographic segment, Apple chief financial officer Luca Maestri announced on the earnings conference call with analysts last week. Currently, we have more than 785 million paid subscriptions across the services on our platform, which is an increase of 165 million during the last 12 months alone.

Apple's gaming-related wearables, including the Watch, AirPods, and Beats headphones, have the potential for growth. However, the company may not release an Apple-branded autonomous vehicle before 2025. Ives predicts that Apple's virtual-reality headset will debut in fiscal 2023, with an initial sales forecast of 15 million units.

Although Wall Street does not anticipate that Apple will have to rely solely on its services business, Wedbush values it at $1.5 trillion.

The growth in hardware still has a ways to run, as the average iPhone is now about three and a half years old, which is well above the two-year lifespan that used to be Apple's norm. Ives said that this likelihood is reinforced by the arrival of 5G, since only 10% to 15% of iPhones now in use are 5G-capable.

Ives stated that he believes sustainable iPhone growth for the next three years will be in the high single digits per year due to pent-up demand and 5G.

Apple's fiscal first quarter 2022 earnings report revealed that iPhone sales accounted for about 70% of its product sales, and its services business was on track to generate $78 billion in revenue in fiscal 2022. The company has consistently released a new iPhone model annually since its inception. An earlier version of this article contained incorrect information regarding these facts.

This is beyond what bulls were hoping for, Wedbush's Dan Ives on Apple's Q1 earnings
by Tim Mullaney

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