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Apple Climbs Back Near a $1 Trillion Market Cap on Record Quarterly Results

Investors who feared the worst ahead of the tech giant's fiscal Q3 report received something entirely different. Read More...

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="With the ongoing trade war between the U.S. and China as a backdrop, expectations were low ahead of Apple‘s (NASDAQ: AAPL) fiscal third-quarter financial release. In its two previous earnings reports, the iPhone maker delivered&nbsp;back-to-back year-over-year revenue declines, primarily as a result of weak sales in China.” data-reactid=”11″>With the ongoing trade war between the U.S. and China as a backdrop, expectations were low ahead of Apple‘s (NASDAQ: AAPL) fiscal third-quarter financial release. In its two previous earnings reports, the iPhone maker delivered back-to-back year-over-year revenue declines, primarily as a result of weak sales in China.

The company signaled last quarter that a return to revenue growth was in the cards for fiscal Q3, guiding for revenue of $53.5 billion at the midpoint, which would have been a slight improvement compared to the $53.3 billion it generated a year prior. 

Apple delivered that and more Wednesday, and investors breathed a huge sigh of relief, particularly in light of comments about its improving results in China.

Apple CEO Tim Cook on stage with the Apple logo on the screen in the background.

Image source: Apple.

A return to revenue growth

Apple reported revenue of $53.8 billion — a record for its June quarter — up 1% year over year, topping analysts’ consensus estimate of $53.4 billion. Earnings were $2.18 per share, down about 7% compared to the prior-year quarter, but matching expectations.  

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="CEO Tim Cook said the company saw "significant improvement in iPhone trends." While sales of Apple's flagship product declined 12% year over year, that was a significant improvement from the 17% drop they took in Q2. On the conference call, he also noted that "iPhone in our retail and online stores returned to growth on a year-over-year basis in the month of June."” data-reactid=”28″>CEO Tim Cook said the company saw “significant improvement in iPhone trends.” While sales of Apple’s flagship product declined 12% year over year, that was a significant improvement from the 17% drop they took in Q2. On the conference call, he also noted that “iPhone in our retail and online stores returned to growth on a year-over-year basis in the month of June.”

Cook also said the company saw “a return to growth in Mainland China,” despite challenging foreign currency exchange headwinds, which reduced revenue by about $1.5 billion.

Services continue to grow in importance

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Services revenue hit an all-time high of $11.46 billion, up 13% year over year; the segment now accounts for 21% of Apple's total revenue,&nbsp;up from just 13% in December 2016. With a run rate of nearly $46 billion, Apple is well on track to meet its goal of doubling its services business to $51 billion annually by the end of 2020. A number of services segment units set records of their own, including AppleCare, Music, cloud services, and the App Store search ad business, while the Apple TV app’s&nbsp;monthly viewers number climbed 40% year over year.” data-reactid=”31″>Services revenue hit an all-time high of $11.46 billion, up 13% year over year; the segment now accounts for 21% of Apple’s total revenue, up from just 13% in December 2016. With a run rate of nearly $46 billion, Apple is well on track to meet its goal of doubling its services business to $51 billion annually by the end of 2020. A number of services segment units set records of their own, including AppleCare, Music, cloud services, and the App Store search ad business, while the Apple TV app’s monthly viewers number climbed 40% year over year.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The company is continuing to put a significant focus on Apple Pay. In fiscal Q3, it expanded the service into 17 more countries, bringing the total number of markets it serves to 47. "Apple Pay is now adding more new users than PayPal (NASDAQ: PYPL), and monthly transaction volume is growing four times as fast,"&nbsp;Cook said on the earnings call. To put that into perspective, PayPal added 9 million net new active accounts in its most recently reported quarter, while transactions grew 28% year over year.&nbsp;That would suggest Apple Pay’s transaction growth is well over 100% year over year.” data-reactid=”32″>The company is continuing to put a significant focus on Apple Pay. In fiscal Q3, it expanded the service into 17 more countries, bringing the total number of markets it serves to 47. “Apple Pay is now adding more new users than PayPal (NASDAQ: PYPL), and monthly transaction volume is growing four times as fast,” Cook said on the earnings call. To put that into perspective, PayPal added 9 million net new active accounts in its most recently reported quarter, while transactions grew 28% year over year. That would suggest Apple Pay’s transaction growth is well over 100% year over year.

The wearables segment — which includes Apple TV, Apple Watch, AirPods, Beats products, and iPod Touch — was another area of significant growth. Cook said wearables had an “absolutely blowout quarter,” with growth accelerating to well over 50%.

CFO Luca Maestri lauded the company’s shareholder-friendly ways, pointing out that Apple bought back about 88 million shares for about $17 billion during the quarter while paying dividends totaling $3.6 billion.

Can Apple retake $1 trillion market cap?

In Wednesday trading, Apple shares have largely floated within the $217 to $218 range. With the 4,531,395 shares outstanding reported on the company’s balance sheet (as of June 30), the stock would have to reach a price of $220.68 for its market cap to surpass $1 trillion. The actual share count is likely lower than that, however, given Apple’s pattern of repurchasing stock. Investors won’t know the current share count until Apple makes its quarterly regulatory filings with the SEC later Wednesday.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="While it's an arbitrary number, it would be nice to see Apple re-top the&nbsp;benchmark it hit in August 2018 — particularly since it was the first publicly traded U.S. company to do so.” data-reactid=”41″>While it’s an arbitrary number, it would be nice to see Apple re-top the benchmark it hit in August 2018 — particularly since it was the first publicly traded U.S. company to do so.

What the future could hold

Whether Apple will be able to deliver revenue growth in its fiscal Q4 remains to be seen, but its guidance suggests it won’t. Management’s forecast calls for revenue in a range of $61 billion and $64 billion. If Apple were to hit the midpoint of $62.5 billion, that would amount to a slight decline from the $62.9 billion it took in during last year’s Q4. It appears analysts are doubtful as well: The consensus estimate calls for Q4 revenue of $61 billion. 

Still, Apple’s results this quarter show that, while challenges remain, the sky is not falling.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content=" More From The Motley Fool ” data-reactid=”45″> More From The Motley Fool

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Danny Vena owns shares of Apple and PayPal Holdings and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Apple and PayPal Holdings. The Motley Fool has the following options: short October 2019 $97 calls on PayPal Holdings, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.” data-reactid=”53″>Danny Vena owns shares of Apple and PayPal Holdings and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Apple and PayPal Holdings. The Motley Fool has the following options: short October 2019 $97 calls on PayPal Holdings, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.

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