Apple Inc (NASDAQ:AAPL) will continue to deliver strong revenue growth driven by the services segment.
California based tech giant Apple Inc (NASDAQ:AAPL) recently reported its fiscal fourth-quarter earnings last week. The earnings report was better than expected on all counts. The company delivered a beat on both the top and the bottom line. Apple reported an EPS of $2.07, 20 cents higher than expected while revenues came in higher by a massive $1.8 billion, at $52.6 billion. The year-over-year growth accelerated for the fourth consecutive quarter. This strong result coupled with optimistic guidance has pushed Apple stock even higher. Apple stock is up by over 50% this year alone. That is a massive rally, especially given Apple's size.
Apple Inc has solid fundamentals. Not only did the company post a strong revenue growth, it also saw its gross margins widen. The company also has a strong balance sheet. Given the strong fundamentals, we rate Apple stock 4.2 on a scale of 5. Apple stock has been part of our top stocks to buy portfolio for several quarters now. Our top stock picks portfolio has outperformed the Nasdaq composite by over 168%. Our bullish stance on Apple stock has paid off. The recent momentum has propelled Apple closer to $1 trillion market cap mark. The question is, will the rally continue? Should you buy Apple stock now?
In the short run, the main factor which will be driving Apple stock higher is the response to its flagship device, iPhone X. And going by the recent media reports, the response has been quite strong. Within minutes of Apple opening pre-orders for iPhone X, delivery times had pushed out to as long as six weeks. In a statement, Apple had said that "We can see from the initial response, customer demand is off the charts." It is very important that iPhone X demand continues to remain strong as most of the stock rally is based on the "iPhone supercycle theory".
The success of iPhone X will mainly depend upon how many existing users upgrade to the latest flagship. And analysts reports suggest that demand is strong. More importantly, most of the iPhone X customers are going for the higher capacity higher priced version of iPhone X. Which is good for both the top line and the bottom line. iPhone demand will also come from markets like China and India where Apple almost doubled its revenue, albeit on a small base.
But, while iPhone remains the main driver of Apple growth story, Apple's other hardware products are are also showing strong growth. For the second consecutive quarter, iPad reported double-digit unit growth. Then Mac had its best year ever, with the highest annual Mac revenue in Apple's history. Mac revenue grew by 25% driven by the notebook refreshes and a strong back-to-school season. And then there is Apple Watch, the latest model of which was launched along with iPhone X. While there were issues with the Cellular version of the Watch, the demand continues to remain strong. For the third consecutive quarter, Apple Watch unit sales grew by over 50% YoY.
Services segment will remain the key.
While iPhone and other hardware will continue to deliver strong performance, Apple growth story will be incomplete without its services division, which is already a size of a Fortune 100 company. The services segment includes revenue from AppleMusic, AppleCare, Apple Pay, licensing and other services. Over the last five years, the services segment has grown at a CAGR of over 23%. In the fourth quarter too, Services segment had delivered over 25% YoY growth, with segment revenue reaching a record high of $8.5 billion in the September quarter. With the continued strong performance, Apple is on its goal of doubling the segment revenue from $24 billion in FY 2016 to $48 billion by 2020. In fiscal 2017, the company had generated $30 billion in revenue from this segment.
However, it not just the growth of the service segment, but also the strong margins which will be key to driving Apple stock higher from here. According to an estimate by Piper Jaffray, the services segment has a gross margin of around 60%. With Apple Pay and Apple Music continuing to deliver strong growth, this segment will be a growth driver for Apple. However, with its announced plan to enter video content business, this segment may see a margin compression in future. All in all, Apple Inc continues to fire on all cylinders with all its four product segment showing strong performance in the current quarter. While iPhone X will be the main driver of Apple stock in the short term, services segment will be the key to long-term performance. We continue to remain bullish on Apple stock.