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Apple - better than expected third quarter

Sophie Lund-Yates, Equity Analyst | 28 July 2021 | A A A
Apple - better than expected third quarter

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Apple Inc Com Stk NPV

Sell: 161.84 | Buy: 161.85 | Change -1.92 (-1.17%)
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Third quarter net sales of $81.4bn rose 36% compared to last year, and reflected record revenue in every geography. That was much better than the market was expecting.

The higher sales meant that despite a 24.8% increase in cost of sales, a 20.2% increase in Research & Development spending, and other increased costs, operating profits jumped to $24.1bn from $13.1bn a year ago.

A quarterly dividend of $0.22 per share was announced.

The shares fell 2.1% in after-hours trading.

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Our view

Apple's recorded another round of record revenue. Crucially, product sales were a driving force of that.

Hardware sales are critical, despite the group doing its best to peg itself as a Services company. iPhones alone make up 48.64% of net sales. Apple has to keep the upgrade cycle going if it wants to boost the more profitable services division in the long-term (more on that later).

The sales increase is testament to Apple's biggest asset - its brand. You'd expect those in the business of selling office and communication hardware to enjoy some benefit from the aftereffects of a pandemic. But the sheer scale of Apple's sales is testament to the grip that the shiny embossed piece of fruit has on global consumers. The unbendingly loyal customer base means that there's an element of revenue visibility other businesses simply don't have.

The powerful brand should also help Apple stand strong in the face of possible rising inflation. Most big-ticket items are quickly rubbed off shopping lists as money loses its value, but there's an army of Apple fans who are likely to keep the next iPhone clearly in their sight.

Apple's looking to capitalise on its legions of fans with its Services business. The division seems to be turning a corner, and makes up a growing part of the total when compared to just before the pandemic struck . 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 - which all being well will take the pressure off the group to deliver constantly rising hardware sales in the future.

There are rumblings of supply chain constraints. While that's never what a manufacturer needs, Apple's huge success means constraints don't pack as much of a punch as they could. The group's amassed enormous resources, meaning if things do get tough, it can wait it out. If the last eighteen months have taught us anything, it's that Apple can hold its own amid disruption.

All of these strengths and another strong quarter might have you questioning why the share price reaction has been muted. Some of it is down to the lingering supply issues, but a lot is because Apple's becoming a victim of its own success. Growth was slower this quarter compared to last , despite still being impressive. The group's reached a point where "very good" is met by shrugged shoulders. That's a nice problem to have, but is something to keep in mind - the bar is set very high.

Overall, we think Apple's core remains strong, but future spoils still rely on growing higher-margin areas of the business while also creating another generation of coveted products. Looking at the latest numbers it would seem so far, so good, on that angle. But remember there are no guarantees.

Apple key facts

  • Price/Earnings ratio: 27.5
  • Average Price/Earnings ratio since: 15.3
  • Prospective dividend yield (next 12 months): 0.6%

All ratios are sourced from Refinitiv. 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 results

Within product sales, iPhone sales rose 49.8% to $39.6bn, Mac and iPad sales were up 16.3% and 11.9% to $8.2bn and $7.4bn respectively. Wearables, Home and Accessories also grew, rising from $6.5bn to $8.8bn. Services was the best performing division, with net sales rising 32.9% to $17.5bn.

The Americas is still the group's biggest market, making up 44.0% of net sales at $35.9bn, up from $27.0bn last year. Greater China saw the biggest improvement overall, with net sales of $14.8bn up over 58%.

The higher profits in turn fed into free cash flow of $76.0bn, up from $54.6bn this time last year. Net debt was $60.1bn at the end of June, compared to $21.5bn at the end of September. That was largely driven by $66.2bn in share repurchases and $10.8bn in dividend payments.

Find out more about Apple shares including how to invest

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 Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.