The Apple stock price slipped 1.58% in trading yesterday (Tuesday) as Wall Street yawned at another great quarter for the Cupertino, Calif.-based tech giant.
AAPL stock had gained 5% in the week leading up to its Q2 earnings announcement, and even was up about 1% in after-hours trading Monday. Apple stock closed at $130.56 yesterday.
The mild reaction is oddly dismissive of a striking earnings beat for Apple Inc. (Nasdaq: AAPL). The company posted earnings of $2.33 a share, well above expectations for $2.14 a share and an astonishing 40% increase year over year. When you're the biggest company in the world, that kind of earnings growth is unheard of.
Let me put this in context. Apple made $13.569 billion in profit in Q2. No other company has close to that kind of net income.
The big banks, which routinely make the top 10, earned less than half of what Apple did in the quarter. Wells Fargo & Co. (NYSE: WFC) reported $5.8 billion in profits, while JPMorgan Chase & Co. (NYSE: JPM) reported $5.78 billion.
Meanwhile, revenue was $58.01 billion, which easily topped forecasts for $55.75 billion. And it was a 27% increase year over year.
As expected, the iPhone set the tone, as it is Apple's biggest money maker. It typically pulls in 55% or more of the company's revenue. And it had a monster quarter.
iPhone Popularity Will Drive Apple Stock
Apple sold 61.2 million iPhones, better than the 58.1 million analysts expected. CEO Tim Cook said iPhone revenue increased a staggering 55% year over year.
And that growth isn't a fluke of this quarter. It's likely to go on for quite some time, given where it's coming from. Sales of the iPhone were up 70% in China, a huge market that has developed a strong appetite for Apple products. (Mac sales in China were up 31%, and App Store sales were up 100%.)
Meanwhile, iPhone sales doubled in Korea, Singapore, Taiwan, and Vietnam, and rose 80% in Canada, Mexico, Germany, and Turkey. The widespread success of the iPhone was a big reason international sales accounted for 69% of revenue. Who says the world can't afford the iPhone?
The global growth from the iPhone figures to keep feeding earnings for the foreseeable future. Cook said AAPL was seeing a "higher rate" of switchers from Android coming to the iPhone 6, and that so far only 20% of existing iPhone owners have upgraded.
Eventually, higher iPhone sales will force the Apple stock price higher. Several analysts raised their Apple stock price targets today. That's nudged the consensus up to $142.68, just pennies below the $142.86 needed to reach the pre-stock split magic number of $1,000 a share.
The Apple Q2 earnings also offered these tantalizing hints about the company's plans for the future...
What We Learned from the Q2 Apple Earnings
The most intriguing thing that came up in the Q2 Apple earnings conference call regarding future plans was some clues about the company's online video strategy.
In discussing Apple's deal to offer the HBO Now service via Apple TV, Cook threw out this tidbit:
"And so where could it go? I don't want to speculate, but you can speculate probably as good as I can about where that can go," Cook stated. "I think we're on the early stages of just major, major changes in media that are going to be really great for consumers, and I think Apple could be a part of that."
After years of teasing us, Apple may at last be finalizing its approach to online video. It represents another frontier for Apple, a fresh source of revenue, and a new way to expand the powerful Apple ecosystem.
Regarding the Apple Watch, Cook was unexpectedly coy. Because the new entry into wearable tech just went on sale last week, it had no impact on Q2 earnings. But Cook uncharacteristically offered no sales numbers on the Watch, saying only that "demand is much greater than supply" and that 3,500 Watch-specific apps had been written.
Hopefully Cook will have a more concrete update at the company's Worldwide Developers Conference (WWDC) event in June.
The Rest of What Mattered in the AAPL Q2 Earnings
Apple stock investors had to be thrilled to hear about the 11% increase in the Apple dividend. The company also expanded the Apple stock buyback program by $90 billion, to $140 billion.
The Apple dividend rose from $0.47 to $0.52 a share. Not only that, but the company committed to raising the Apple dividend every year from now on. That's yet another reason to own Apple stock.
Often lost in these earnings reports is how well the Mac is doing. Apple sold 4.6 million Macs, a bit lower than the 4.7 million expected but a 10% gain over the year-ago quarter.
But as Cook noted, research firm IDC said the global PC market contracted by 6.7% in the March quarter. That the Mac keeps bucking the trend is at least partly due to the Apple ecosystem, which rewards customers for staying in the Apple fold with unmatched product integration.
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Apple Pay also got a big win by luring retailer Best Buy Co. Inc. (NYSE: BBY) away from rival payment system CurrentC. Cook also said Discover Financial Services (NYSE: DFS) had signed on. The number of locations that accept Apple Pay tripled in the quarter, all good news for the Apple ecosystem.
A healthy ecosystem is also why the App Store had revenue growth of 29%. Apple cited App Annie data that said Apple gobbled up 70% more global revenue in the quarter than rival Google Play, even though Google Play has 70% more downloads than the App Store.
Only the iPad stands out as a laggard. Sales of the iPad fell 23% to 12.62 million units. But Apple seems strangely optimistic on the iPad anyway.
The company believes that enterprise sales will at some point rescue the iPad from its doldrums. Cook said the deal with International Business Machines (NYSE: IBM) to make enterprise software for the iPad was "in its early stages of bearing fruit."
But until sales start growing again, the iPad will remain the black sheep of the Apple family.
Apple Stock Going to $200 a Share: It's a bold prediction, but Money Morning Chief Investment Strategist Keith Fitz-Gerald feels very strongly about it. He sees Apple stock hitting $200 in 24 months or less. That would push Apple's valuation way past the $1 trillion mark. Here's why Fitz-Gerald is so bullish on Apple right now...
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.