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Apple - record number of active devices, strong Q1

Sophie Lund-Yates, Equity Analyst | 28 January 2022 | A A A
Apple - record number of active devices, strong Q1

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Apple Inc Com Stk NPV

Sell: 165.34 | Buy: 165.35 | Change -0.23 (-0.14%)
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First quarter net sales rose 11.2% to $123.9bn, as both Products and Services grew - with the smaller latter division up almost 24%. That was better than the market expected. Operating profit rose to $41.5bn from $33.5bn.

Luca Maestri, Apple's CFO, said growth was driven by "the very strong response" to new product launches and Services. There is now a record number of active Apple devices.

Apple has proposed a quarterly dividend of $0.22 per share.

The shares rose 5.0% in after-hours trading.

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Our View

Despite enormous macroeconomic pressure, Apple's delivered another round of record growth. That's hard to do when the world is normal, let alone today. The incredible performance comes down to Apple's nail-on-the-head new product launches.

Hardware sales are critical, despite the group doing its best to peg itself as a Services company. iPhones alone make up over half 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. 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 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. And such is Apple's strength, it seems to be avoiding the worst of the inflation-linked tech sell off some of its peers have faced.

Apple's looking to capitalise on its legions of fans with its Services business. The division makes up a growing part of the total when compared to just before the pandemic struck. It makes money from charging subscriptions for various services and gets fees from app developers to use the App store. Service margins are higher and revenues should be more reliable - which all being well will take the pressure off the group to deliver constantly rising hardware sales in the future.

There are some reasons for caution. Apple's operating model relies on an incredibly short production cycle, as competition in the hardware space is so competitive. And competitors are closing the gap. Some have an even larger installed product base and offer better prices. If Apple's brand ever slips - like we've seen with some heavily branded clothes - the shine would very quickly rust on that tiny famous apple.

Compared to less hardware focused FAANG peers, Apple is also a lot more exposed to supply chain disruption. It's managed to navigate the problems very well, but hasn't escaped unscathed. If conditions deteriorate there could be a harsh reaction from demanding investors. Add in questions from some shareholders about forced labour and carbon footprint concerns and it becomes clear that while the Apple is still plenty good enough to eat, there's some potential for bruising.

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: 27.0
  • 10 year average Price/Earnings ratio: 16.1
  • 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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First quarter results

There was growth in all regions apart from Japan, with Greater China the strongest performer. The Americas - Apple's biggest market - rose double digits and made up 41.5% of total net sales.

iPhones (57.8% of net sales) rose to $71.6bn from $65.6bn. There was growth in all products, except iPads. Mac net sales rose 25.1% to $10.9bn, while Wearables, Home and Accessories rose to $14.7bn from $13.0bn.

The increase in profits came despite an 18.2% increase in operating expenses, including $6.3bn spent on Research and Development.

The group had net debt of $53.9bn, and generated free cash flow of $44.2bn.

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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 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.


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