- Apple Inc. beat analyst EPS estimates, while revenue was in line with expectations.
- However, Apple stock was down by over 2.5% in after-hours trading.
- Should investors use the post-earnings dip to buy into Apple stock?
Apple Inc. (NASDAQ:AAPL) announced its Q4 2016 earnings yesterday, after the market close. The company reported a mixed quarter, beating the consensus EPS estimate by 2 cents, while reporting revenue in-line with expectations. iPhone sales came in at 45.5M units, beating the street consensus by nearly a million units. However, Apple stock price traded 2.8% lower (at the time of writing) in after-hours trade, as expectations of weaker profit margins in the Holiday quarter spooked investors. There were many silver linings in Apple's latest earnings release and here are 3 reasons to buy into the post-earnings dip.
The Results Were Better Than 'Raised' Estimates
Apple Inc. reported EPS of $1.67 on revenue of $46.85B, which isn't great when compared to analyst expectations of $1.65 in EPS and $46.89B revenue. However, these were raised expectations, as was pointed out in our Apple earnings preview. Wall Street anticipated EPS of $1.6 and revenue of $45.9B a couple of months ago, prior to the launch of the iPhone 7. Well, the fact that Apple outperformed expectations which were constantly rising through the quarter, is something the market has probably missed, or is being under-appreciated by investors. In short, while YoY decline continued for the third straight quarter, the rate of decline was certainly slower than what most were anticipating and was an improvement over the last two quarters.
Apple Will Return To Growth In Q1 2017
Apple revenues and earnings have now declined on a YoY basis, for 3 straight quarters, with Q4 revenue declining by 9% YoY and the EPS number coming in 15% lower than the Q4 2015 reading. To put this into perspective, Apple EPS declined by an average of 20.5% YoY in the last 2 quarters while the revenue declined by an average of 13.7% over the same time period. Hence, the Q4 readings were certainly an improvement over the last couple of quarters. What's even better is that Apple should return to growth with a strong holiday quarter, with the management guiding for a record-setting $77B (guidance midpoint) in Q1 2017 revenue (December quarter), implying a YoY growth rate of 1.5%. While the growth is not huge, it is definitely trending in the right direction. (See: What's Next For Apple Inc. After It Scales Down Project Titan?)
Apple Services Segment Is Gaining Momentum
The services business continued its strong momentum, registering 24% YoY top line growth with $6.325B in revenue. The segment contributed 13.5% to Apple's overall revenue, which was up from 9.9% in Q4 2015. The services segment has now been the second largest of Apple Inc.'s reporting segments for 3 straight quarters and should soon reach a stage where it should start to have a greater impact on Cupertino's overall numbers. Quoting Tim Cook from the Q4 2016 earnings conference call:
We had a record-setting quarter for Services, with revenue growth accelerating to 24%, reaching $6.3 billion. App Store revenue continued to skyrocket, while Music revenue grew by 22% thanks to the growing popularity of Apple Music.
We have almost doubled the size of our Services revenue in the last four years, and as we've said before, we expect it to be the size of a Fortune 100 company in fiscal 2017.
To put this into perspective, General Dynamics (NYSE:GD), which was ranked 100th in the Fortune 100 list in 2015, had annual revenue of $31.5B in 2015 while Apple's services segment closed FY 2016 with revenue of $24.35 Billion. Using $30B as the ballpark, Apple services should continue on its 20% growth trajectory over the next 4 quarters, which will support the overall growth of Apple.
Apple Inc. reported a marginal earnings surprise while reporting in-line revenue for Q4 2016. While the market has taken a dim view of the weaker than expected profit margins in the holiday quarter, there were plenty of reasons to bullish on Apple stock. Hence, long-term investors should use this post-earnings dip to pile on more Apple shares at even more attractive prices. (Also see: Amigobulls Latest Top Technology Stock Picks)