The two key updates in Apple’s earnings that sellers of the stock are overlooking

Club name Apple (AAPL) on Thursday delivered an earnings beat for the December quarter. But shares of the consumer tech giant fell in the after market, thanks to a bit of top-line weakness in its services business and what appears to be a miss on guidance. Those sellers are overlooking a couple important updates. Revenue in Apple’s fiscal first quarter hit $119.6 billion, up 2% from a year ago, despite one less week this quarter, and outpaced Street estimate of $117.9 billion. Earnings per share of $2.18, a 16% gain from a year ago and above the LSEG consensus estimate of $2.10 per share. Gross margin was 45.9%, expanding nearly 300 basis points from a year ago and coming in slightly above the 45.5% estimate. One hundred basis points (bps) equals 1 percentage point. Bottom line It was a very good quarter for Apple on the eve of its entrance into the “spatial computing” arena with the launch of the Vision Pro on Friday. Though sales for its services did come up marginally short versus expectations, this high-margin and recurring revenue business nonetheless set a new all-time high. Moreover, the miss in sales was more than made up for with strong gross margin performance, leading to a better-than-expected result for gross income. Helping to drive the record quarter for services was double-digit growth in paid subscriptions. Overall results for the product unit were better-than-expected, with strength in iPhone, wearables, home and accessories more than offsetting the weakness in Mac and iPad sales. More importantly, and music to our ears, management told investors on the post-earnings conference call that the installed base of active devices once again hit a new all-time high in all geographies and product categories. It now stands at over 2.2 billion active devices. Geographically, China was the weak spot, down 13% and coming in short versus expectations. However, we saw plenty of strength elsewhere, including all-time records in Malaysia, Mexico, the Philippines, Poland and Turkey, and December quarter records in India and Indonesia, Saudi Arabia, and Chile. In terms of innovation to come, CEO Tim Cook held the AI cards close to his chest. The final question on the call asked for his thoughts on edge computing — on device, rather than in the cloud — and if AI processing on devices like the iPhone represents an opportunity. His response? “Let me just say that I think there’s a huge opportunity for Apple with gen AI and AI,” Cook said before cutting himself short. It sounded like he wanted to divulge more but held back. Nonetheless, it supports our view that those thinking Apple won’t be a key beneficiary of the AI revolution unfolding are mistaken. We will be on the lookout for how the company leverages the new technology as 2024 progresses. A Siri upgrade seems like an obvious first move. The bottom line is this was an uneventful quarter. But it was a beat and we heard everything we needed to confidently reiterate our “own it, don’t trade it” mantra. The company also remains a cash printing machine intent on being net cash neutral over time as free cash flow exceeded net income. This once again shows the incredible quality of the earnings result. The guidance indicates that we could see numbers come down a bit in the days ahead, but Apple will surprise by the end of the year – be it from strong performance in the Vision Pro, continued growth in the installed base, new records in services revenue, or a surprise generative AI announcement. We are therefore reiterating our $205 price target. However, we maintain our 2 rating until we see a better opportunity to scoop up more shares, after the shortsighted sellers clear out. Cash flow and capital allocation In its June quarter, Apple generated operating cash flow and free cash flow results that handily exceeded Street expectations. This allowed Apple to return nearly $27 billion via buybacks and dividends. Apple exited the quarter with roughly $173 billion in cash, equivalents and marketable securities on the balance sheet. After subtracting $108 billion of debt, we’re left with a net cash position of about $65 billion. As a reminder, Apple has a policy of being net cash neutral over time, meaning that if the cash isn’t used for acquisitions or organic growth investments, it’s returned to shareholders through buybacks and dividends. Quarterly commentary As you can see in the chart above, product sales came in better than expected, driven by strength in the iPhone and wearables, home and accessories. Though the result is unchanged from a year ago, there was one less week in this quarter. On the call, CFO Luca Maestri noted that a survey from Kantar showed iPhones accounted for four out of the top five smartphone models in the U.S. and Japan, four out of the top six in urban China and the UK, and all top five models in Australia. The Mac’s return to growth is also notable, especially given the shorter quarter, indicating a significant acceleration in growth versus the September quarter. In services, sales advanced 11% year over year on the back of double-digit growth in paid subscriptions. Also note that while the growth rate in the table above is below last quarter, management noted the shorter quarter versus last year indicates the segment’s growth has actually accelerated versus the September quarter. Apple achieved all-time revenue records across advertising, cloud services, payment services, and video, and December quarter records for the App Store and AppleCare.” Maestri added Apple now has 1 billion paid subscriptions across the services on its platform, more than double the number from just four years ago. Guidance For the current March quarter, management reminded investors that the December quarter last year took a hit on iPhone 14 supply constraints resulting from Covid-induced factory shutdowns. That resulted in a push out to the March quarter (the one we are now lapping) that in their estimation added about $5 billion to the top line. When excluding that benefit, management stated that total company revenue and iPhone revenue will be similar to a year ago. As a result, the guide looks a bit light. Street estimates coming into the print showed slight growth, less than 1%, versus last year’s sales result, with iPhone revenues down about $1.6 billion versus the year ago period. Apple management’s commentary, however, seems to indicate that total sales will be about $5 billion lower than what was actually reported last year. The services guide may also be a bit light, with the company saying it expects a similar double-digit growth rate to to the December quarter. Assuming that means about 11%, it’s a tad below the Street estimate of 12.6% but solid growth nonetheless. On top of that, expected gross profits margin of 46% to 47% — versus consensus 45.2% — should offset some weakness on sales. Operating expenses of $14.3 billion to $14.5 billion are expected, right in line with the $14.4 billion estimate. The weaker guide is not a reason to sell. We see strong and improving fundamentals in the earnings report. We’ve said it before and we’ll say it again, the installed base — which hit all-time highs in all product categories and across all geographies at over billion — matters far more from a long-term investment perspective than sales in any three-month period. (Jim Cramer’s Charitable Trust is long AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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