Apple’s Q2 earnings surpassed timid expectations, yet doubts linger over the company’s ability to drive significant future growth.
- Apple’s Q2 earnings beat modest expectations, with a $110 billion buyback program and strong services revenue.
- Growth challenges persist despite positive quarterly results, raising doubts about future initiatives.
- While the company maintains its status as a cash cow, I think doubts persist about its ability to spur significant future growth.
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Following the Q2 earnings release, Apple stock (AAPL) surged by just over 6%. The market was buoyed by several factors in the report, such as slight revenue and EPS beats compared to consensus estimates, as well as the impressive $110 billion buyback program.
Despite the positive quarter, I don’t believe it was quite enough to warrant the level of optimism surrounding the company.
Apple’s Q2 Earnings Highlights
The second fiscal quarter results for Apple can be summarized as ‘surpassing already modest expectations’. The company managed to achieve $90.75 billion in revenues, slightly above the anticipated $90.5 billion. However, this still represents a 4% decline year-over-year (YoY).
The revenue decline underscores the challenging market conditions Apple faces. Year-over-year comparisons show a 10% decrease in iPhone and Wearables revenue, with iPad sales plunging by 17%. Once again, services stood out, reaching a record $23.8 billionin revenue for 14% growth.
The increased representation of services also contributed to maintaining strong operating income, reaching $27.9 billion, slightly higher than the expected $27.6 billion. This was not only due to increased revenue but also margin that exceeded expectations by 10 basis points.
One of the market’s highlights was the $110 billion buyback program, the largest in Apple’s history and quite impressive. This underscores the company’s healthy financial position and efforts to return value to shareholders.
In my view, the real highlight of this quarter (alongside services) was the outlook provided by Tim Cook regarding growth in China, expressing confidence in the long-term prospects. This is undoubtedly one of the company’s challenges in the short and medium terms, given that China is the third most important region, trailing only the Americas and Europe, despite a recent 8% YoY decline.
Why I Believe Apple’s Earnings Fell Short
To reinforce, in terms of short and medium-term growth prospects, the current quarter didn’t inspire much confidence. While surpassing estimates is noteworthy, the margin of outperformance was minimal, signaling a genuinely challenging landscape, despite the company’s undisturbed status as a cash cow.
Among the significant announcements was the iPad event held on May 7. During the earnings call, it was mentioned that the company expects a double-digit rebound for iPads in the next fiscal quarter, driven by new models integrated with the M4 chip, representing a significant leap compared to iPads with the M2 chip. However, it’s worth noting that iPad revenue is only around $5.5 billion, compared to over $90 billion in total revenue.
The iPad announcement, combined with the $110 billion buyback program, suggests that the company currently sees limited growth opportunities in new areas. While returning value to shareholders is positive, the magnitude of this buyback leads me to believe that the company isn’t finding new ways to allocate capital to grow the business further, such as new ventures like Apple Vision Pro, Apple Car, and GenAI.
Apart from the iPad event, it’s important to note that the company will announce new developments at WWDC, although there were no pre-revelations during the call. Expectations are that these developments will be related to AI.
It’s also worth mentioning that new positive earnings cycles driven by a rebound in iPhone sales and continued services growth can be achieved with minimal capital, which is even more favorable for shareholders. However, it seems that Apple’s “big plans” aren’t as big as they appear and seem to lag behind the innovations of peers such as Microsoft (MSFT) and Nvidia (NVDA).
In any case, some factors continue to support Apple as a unique company, such as its strong cash generation and expectations for maintaining double-digit growth rates in services, which are fundamental aspects of the bullish thesis.
The Verdict
Based on the above information, I believe that the current quarter reinforced that Apple still faces growth challenges, and the prospects for addressing them through new initiatives have yet to materialize, although there are expectations regarding AI in upcoming events.
The $110 billion buyback program certainly demonstrates a pro-shareholder stance by the company, pleasing investors who expect a mature, cash-cow company to return this value. On the other hand, it may also deter investors seeking growth.
From my perspective, the fiscal Q2 wasn’t bad, but it didn’t seem to signal an imminent turnaround for growth in the short/medium term, which could be a headwind for the stock.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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