Apple Is Firing On All Cylinders But Is Still Expensive

Apple reported its December 2021 quarter results after the markets closed last Thursday, January 27. In pretty much every way the company reported strong results and seems to be navigating the chip supply problem.

The company’s market cap is closing in on $3 trillion again. However, even with the stellar numbers it reported, due to lower growth rates the next few quarters, it could be hard to reach or materially exceed it.

Total revenue hits another record

Apple generated almost $124 billion in revenue in the December quarter, an increase of 11% year-over-year. The major contributors were iPhones, as usual, with Services continuing their upward climb. China has come roaring back with Wearables, Home and Accessories continuing to beat Macs and iPads. The only segments that declined year-over-year were iPads and Japan.

iPhone revenue still accounting for over half of total revenue

iPhone revenue of $71.6 billion was up 9% year-over-year and 28% from the December 2019 quarter, before any supply chain issues arose due to the pandemic. Strong ASPs or Average Selling Prices could be helping to offset any supply issues.


iPhones accounted for 58% of total revenue and sales in China are also helping as revenue from that geography increased 21% year-over-year and is up 90% over two years.

Services revenue is a major driver for the company

Services revenue of $19.5 billion hit a new record in more than one way. It was the largest amount ever in a quarter and generated its highest gross margin at 72.4%. Its gross margin increased by 190 basis points from its previous 70.5% high in the September 2021 quarter.

Revenue also increased 23.8% year-over-year against a tough 24% growth rate a year earlier. If Apple can continue to grow services at mid-teens or higher rate, along with high margins, its bottom line should continue to increase.

Gross margins haven’t been this high since the March 2012 quarter

Total gross margins came in at 43.8%, which is the highest since the March 2012 quarter’s 47.4%. The 43.8% is the probably the third highest margin the company has ever generated as my model only goes back to 2003, so maybe there were very high margins before then.

What is very impressive about the 43.8% is that it looks like 40% plus gross margins are sustainable as this is the fourth quarter in a row of 40% plus results as services plays a larger role in the company. Services are generating gross margins at 70% or higher vs. hardware margins running about 35% to 38%.

Revenue growth to slow

While Apple is executing very well, its growth rates are slowing and will be fighting very tough comparisons the next few quarters. Bernstein’s Toni Sacconaghi charts below show how total and iPhone revenue growth rates have slowed the past three quarters.

The company is facing its toughest comp in the current, March 2022, quarter. Sacconaghi is forecasting 5.2% and 2.6% total and iPhone revenue growth in this quarter, respectively. However, he has total revenue growing by 6.1% and 11.9% in the June and September quarters this year, respectively, even though iPhone revenue is forecast to decline by 2% in the June quarter and rebound to 9% growth in the September quarter. He is expecting Services and Wearables to make up the slack.

Therefore EPS growth also slows

Apple easily beat Street EPS expectations with $2.10 per share, 11% above the average sell-side estimate and increasing 25% year over year.

However, as the next chart shows the growth rate has been lower for three quarters in a row with forecasts showing the March quarter’s EPS growth to be down low single digits to a small single digit increase.

Valuation is still high

Apple’s P/E multiple roared higher starting in mid-2020 due to a combination of work from home sales and anticipation of a 5G iPhone. The shares P/E moved from a mid-teens range to top out over 35x when the iPhone 12 was on the cusp of being announced. The multiple fell to about 25x partially due to the stock falling but also as EPS estimates rose. At its current 27x it is high by historical standards.

10 analysts raised their price targets

Philip Elmer-DeWitt at Apple 3.0 tracks sell-side analysts price targets. After Apple reported its results 10 of them raised their price targets. The stock closed at $174.78 on Monday.

Stock was oversold going into the quarter

The chart below from has two distinct technical indicators that have helped the shares move higher by over $15 or 10% in the last two days. First the shares were oversold as shown by its RSI or Relative Strength Index in the top portion. An RSI of 30 means the stock was oversold and unless there had been very bad news, the shares were primed to rebound.

The second technical indicator is for the four days before results were announced the shares had touched its 100 daily moving average or DMA of about $158 but closed above it all four days. This trend line had become support for the stock.

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