Apple Roars Ahead with $123.9B Quarter, Surpassing Sales Targets, with the Popularity of the new iPhone 13 and Services

Showing us all how it's done, Apple $AAPL roars ahead on the popularity of the iPhone 13 with $123.9 B in revenue, its highest yet, surpassing sales targets on every product line, bar iPads.

Image via Apple

Dialing it up

Soaring by 11 percent for the quarter, Apple clocked in at $123.9 billion for its first quarter, its highest quarterly earnings yet, flying past investor and industry expectations and outselling sales goals in every category, bar its iPad product line. Supply chain hurdles created by bottlenecks during the pandemic accounted for the holdup on iPads as demand has still been insatiable.

“This quarter’s record results were made possible by our most innovative lineup of products and services ever. We are gratified to see the response from customers around the world at a time when staying connected has never been more important. We are doing all we can to help build a better world — making progress toward our goal of becoming carbon neutral across our supply chain and products by 2030, and pushing forward with our work in education and racial equity and justice.”

— Tim Cook, Apple CEO

Live on January 27, 2022, Apple’s Investor webcast for Q1 2022 is available for two weeks after. Here are the consolidated statements (PDF).

Apple CEO Tim Cook in Los Angeles, CA. © Lucy Nicolson, Reuters

Improvements in Supply Chain

When Apple introduced its own Apple chip (M1 series) for its MacBook Pros, its highest performing asset during the fourth quarter of 2021, the company eliminated a major supply chain bottleneck and logistical constraint, removing its dependence upon Intel. The last quarter of 2021 also included holiday sales. Apple has faced some bottlenecks with semi-conductor chip supply for ‘legacy nodes,’ during the pandemic, like all businesses and industries that require these silicon components for their products. Nonetheless, the company has done very well in taking control of its business supply chain. Despite supply chain bottlenecks, Apple still increased iPhone sales by 9 percent — an accomplishment the company is proud of.

What’s the difference between ‘leading edge’ chips and ‘legacy node’ chips? Leading edge chips consist of the robust processors required to drive the iPhone’s core functionality while ‘legacy node’ chips consist of simpler, less sophisticated parts to manage power or run displays.

Taking into account uncertainty due to the pandemic, Apple has not provided estimates for the next quarter. However, Apple CEO Tim Cook did say that the supply chain is improving in an interview with Julia Boorstin of CNBC, which she shares during CNBC’s Squaw Box. Apple CEO Tim Cook also told CNBC that Apple was inevitably facing inflationary pressure as it could not be avoided.

“What we expect for the March quarter is solid year-over-year revenue growth. And we expect supply constraints in the March quarter to be less than they were in the December quarter.”

— Tim Cook, Apple CEO

Quick Breakdown of Category Sales

In September 2021, Apple released new iPhone models. The last quarter of 2021 offered up insight on iPhone 13 sales, given that it was the first reporting and sales cycle, with strong demand, up 9 percent to $71.63 billion.

Other areas of Apple’s business grew at faster rates such as Services that includes iCloud, Apple Music, App Store fees and search licensing up to 25 percent for the year to $19.52 billion. Services have become Apple’s most profitable business sector unit. Other product categories such as the Apple Watch including the Series 7 Watch and AirPods (newer version) each grew by 13 percent over the year.

Macs led Apple’s hardware sales, growing 25 percent to reach $10.85 billion, including the well-received MacBook Pro models at $1,999 apiece featuring the new Apple chip.

While iPad sales did not meet investor analyst estimates, Apple CEO Tim Cook explained that while demand was high, Apple was unable to make sufficient iPads due to large supply chain constraints.

Lifting Up the Dow and S&P

Just three weeks ago, Apple became the first company to reach a $3 trillion market value, lifting up both the S&P 500 and Dow to record closing highs. The company closed out 2021 beating estimates by Factset.

Turning iPhones into Cash Payment Terminals

Citing anonymous sources, Bloomberg reports that Apple intends to turn iPhones into direct cash payment terminals, enabling merchants to accept payments via a tap of a credit card or another iPhone and without requiring additional hardware. Apple’s privacy-enabled Apple Pay has been hugely successful and with the iPhone already offering versatile functionality and reaching users worldwide, this payment option can further simplify the payment process for many merchants. It also could put Apple into direct competition with Block-owned Square known for its ubiquitous square-shaped device that pulls into existing smartphones and tablets to enable payment processing.

In 2020, Apple paid $100 million for Mobeewave to build out this functionality. Mobeewave was a Canadian startup that developed technology for smartphones to accept payments with just a tap of a credit card. The new payment system is expected to use the iPhone’s NFC or near field communications chip that is used for Apple Pay.

Apple Hits Trillion Mark Again by Market Cap

For a second time, matching last year’s performance, Apple became a trillion dollar company by market cap, which consists of the total outstanding shares multiplied by stock price.

Hitting a stock price above $221.28 in intraday trading today, Apple reached a market cap just above $1 trillion based on its 4,519,180,000 outstanding shares as of July 19, 2019, which the company shared in its most recent SEC quarterly 10-Q filing. The company also continues to buy back shares. Apple’s stock AAPl went up by 3 percent after Apple hosted its popular annual iPhone and Apple Watch event at the Steve Jobs event yesterday.

Microsoft at $1.03 trillion, is the only other American company to achieve the trillion dollar market cap in recent times, but Amazon has achieved this in the past and Alphabet, Google’s parent company, has come very close.

Apple's New Media Bundle Could Raise to a Trillion Valuation Again, Says Morgan Stanley

Morgan Stanley predicts that Apple can reach a trillion valuation if the company launches a media bundle in 2019.

While Apple recovers from its earnings call prediction earlier this year, many financial analysts are doubtful that the Cupertino tech giant would ever be able to repeat its feat of a trillion dollar valuation again. Morgan Stanley’s financial analyst Katy Huberty, who accurately predicted prior valuations, sees things differently.

Huberty shared her views on CNBC that Apple could see large growth if the company launches a media bundle this year consisting of music, television streaming and its new Texture news subscription. The bank targets Apple’s 12 month share price at $211 (AAPL).

This past Friday, Apple’s stock ended the week a little over $166 with a $785 billion market cap. Shares were roughly $206 apiece when the company reached its first $1 trillion valuation.

*AAPL as of Friday closing, February 1.*

The bank estimates that a new Apple media bundle could bring in another 2 percent annually to Apple’s growing services revenue to “drive a 5 percent revenue and 12 percent earnings per share (EPS) annual growth rate through 2023.” Apple’s ‘media bundle’ has been discussed in the media for a while, starting with a report in June 2018 via The Information claiming that Apple would be offering a possible one subscription model that included music, TV and news. The Texture built-into Apple News has been called a “Netflix for magazines.” Bloomberg reported in December however that the new magazine option had not been welcomed by advertisers.

On Tuesday of this week, Apple announced its earnings for the 2018 holiday season and last quarter, reporting $84.3 billion in revenue and $19.97 billion in profit.

Morgan Stanley predicts an increase in stock buybacks. This active buyback program along with a better knowledge of "the stabilization path for iPhone and impact of new services" will catapult Apple's valuation back past the $1 trillion mark. Huberty has previously commented on Apple’s services business back in November, predicting that Apple will expand its services division as the global hardware market contracts. She pointed out that Apple is "more engaged iOS user base and broadening portfolio of Services," compared to its competitors. Apple is thus expected to maintain 20 percent annual growth over the next five years overall due to the growing Services division.

“After repurchasing $8.8 billion of stock in the December quarter, below the prior $20 billion run-rate, we see a more active buyback program helping re-rate shares, as investors better understand the stabilization path for iPhone and impact of new services.”

— Katy Huberty, Morgan Stanley financial analyst

Huberty expects that iPhone growth will return and that replacement rates are at mature levels.

“iPhone replacement cycles now stand at mature levels suggesting a stabilization of growth is in the cards over the next year [commenting on Apple CEO Tim Cook’s remarks]. Management’s commentary that demand improved in January is similarly encouraging.”

— Katy Huberty, Morgan Stanley financial analyst

Huberty forecast $101 billion in Services revenue alone in 2023, a large increase from 2018 revenue of $37.2 billion. To understand these numbers in context better, it is helpful to look at Apple’s iPhone sales in the same year period. In 2018, Apple sold $112 billion in iPhone hardware in the U.S. alone. Hence, it is clear that the Services division is growing significantly.

Morgan Stanley has accurately predicted Apple's Services revenue growth over the last six quarters, more precisely than both Rosenblatt and Merrill Lynch who under-estimated Services revenue. Apple’s growing Services sector is expected to include video content, benefiting from Apple’s existing large subscriber base.