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Apple - sales better than expected

Sophie Lund-Yates, Equity Analyst | 31 July 2020 | A A A
Apple - sales better than expected

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Apple Inc Com Stk NPV

Sell: 161.84 | Buy: 161.85 | Change -1.92 (-1.17%)
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Revenue of $59.7bn was up 10.9% on last year, and beat market expectations of $52.2bn. An 11.8% increase in research & development spending to $4.8bn, and a 9.2% rise in general & admin costs didn't offset the higher sales, meaning operating income rose 13.4% to $13.1bn.

Sales rose in every region, although growth in Greater China was slower than other geographies.

The group said "the full extent of the future impact of the COVID-19 pandemic on the Company's operational and financial performance is currently uncertain and will depend on many factors outside the Company's control".

Apple declared a dividend of $0.82 per share.

The shares rose 6.3% following the announcement.

View the latest Apple share price and how to deal

Our view

There were concerns coronavirus would be a spanner in the works for Apple, but the latest set of results prove this isn't the case.

Growth is slower than perhaps it would have been - particularly in Greater China. But the big picture remains pretty bright in our view. The biggest reason for this is the fact hardware sales have continued to grow, and at a fairly impressive rate given the circumstances.

That's crucial because Apple is still very much a hardware company. Convincing people to upgrade their phones is becoming trickier, as the differences between models become more nuanced, and competitors edge into Apple's pie. That's perhaps behind the launch of the new iPhone SE, which at around $399 is less than half the price of some current models. We'd argue this model should do well in the face of global recession too as discretionary spending gets squeezed.

So we also have a close eye on the upcoming iPhone 12 launch. This will be Apple's first 5G enabled device, and feels like the first time in a while a new generation of phone has something different for consumers to get excited about. We expect this model will have a higher price point though, so it will be interesting to see if global customers can be convinced to open their wallets that bit wider.

Apple customers are incredibly loyal and Apple's looking to take advantage of that with its Services business - now comfortably the second largest division. It makes money from charging subscriptions for its music service and getting fees from app developers to use the App store. Service margins are higher and revenues should be reliable - even in this environment - which all being well will take the pressure off the group to deliver constantly rising hardware sales in the future.

We should flag that the ongoing anti-competition probe has highlighted Apple's app store fee structure as a potential issue. If the group is forced to lower its cut it wouldn't be ideal, but we also don't see this as materially changing the investment story at this time.

Overall we think Apple's core remains strong, but future spoils rely on growing higher-margin areas of the business while also creating another generation of coveted products. We've been impressed by recent momentum, but we'll need to see how the latest products resonate before signalling out-and-out positivity.

Apple key facts

  • 12m forward Price/Earnings ratio: 26.5
  • 10 year average 12m forward Price/Earnings ratio: 13.9
  • Prospective yield: 0.9%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter trading details

iPhone sales were up 1.7% to $26.4bn, while Mac and iPad sales were up 21.6% and 31.0% respectively. Wearables, Home and Accessories posted a 16.7% increase to $6.5bn thanks to strong growth in AirPods, while Services saw growth of 14.8% to $13.2bn.

Sales rose in every region, although Greater China saw the slowest growth, with sales up just 1.9% to $9.3bn. The Americas reported a 7.8% rise to $27.0bn, while Europe's sales of $14.2bn were 18.9% higher than last year. Japan reached $5.0bn compared to $4.1bn last year, and the rest of Asia Pacific was up 17.0% at $4.2bn.

The better profitability meant free cash flow was $54.6bn in the first nine months of the year, and Apple had cash, cash equivalents and marketable securities of $93.0bn on the balance sheet as at 27 June.

Luca Maestri, Apple's CFO also said: "The record business results drove our active installed base of devices to an all-time high".

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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