We’re raising our price target on Apple after its big earnings beat and raise

Apple did it again: Despite all the worries about China, the consumer tech giant hit back with beats on the top and bottom lines, sending shares up 6% in after-hours trading. This is why we own it. This is why we don’t trade it. Apple’s fiscal first quarter revenue hit $90.75 billion, down 4% from a year ago but ahead of the LSEG estimate of $90.01 billion. Earnings per share rose 1% to $1.53, a March quarter record, and exceeded the LSEG consensus estimate of $1.50. Gross margin was 46.6%, an expansion of 230 basis points from a year ago and in line with expectations. (One hundred basis points (bps) equals one percentage point). Apple Why we own it: Apple’s dominant hardware and growing services businesses provide a deep competitive moat and plenty of bundling opportunities. Management’s so-called net cash neutral strategy provides confidence that free cash flow will continue to fund dividends and buybacks. Plus, the company’s commitment to the customer experience has translated to industry-leading user loyalty scores, giving it pricing power. There’s a reason it’s one of only two “own it, don’t trade it” stocks in the portfolio. Competitors: Most recent buy: April 8, 2014 Initiation: Dec. 2, 2013 Bottom line There was much to like in Thursday’s quarterly results. Top of the list: The consumer tech giant hit another record for its installed base of active devices, across all geographies and product categories — which helped drive another record in the high-margin and recurring revenues from its services business. We were also very pleased to see sales in Greater China come in better than expected, especially given its sluggish economy and Wall Street’s unwillingness to give companies a pass on sales misses in the region. Growth was still negative versus last year, but the iPhone drove an acceleration sequentially in the region and holds the number 1 and 2 spots for top-selling smartphones in urban China. Meanwhile, the company set new sales records in Latin America, the Middle East, Canada, India, Spain, Turkey and Indonesia. On top of this strong performance, Apple announced a $110 billion share repurchase authorization, the largest corporate buyback of all time. Apple is as strong as ever, and we see positive catalysts ahead. CEO Tim Cook is itching to share the company’s artificial intelligence efforts, and we expect to learn more at WWDC in June. “We are making significant investments and we’re looking forward to sharing some very exciting things with our customers soon,” Cook said. “We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple’s unique combination of seamless hardware, software, and services integration, groundbreaking Apple silicon with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create.” We couldn’t agree more. Consider how much information is in your phone. Apple is in a position to offer a generative AI-based personal assistant that is truly personal — and with plenty of privacy safeguards. Given all the positive underlying fundamentals and catalysts, Apple stock deserves to be higher. We are therefore raising our price target to $220 from $205. Cash flow and capital allocation Apple generated operating cash flow that was a bit below expectations. However, capital expenditures were also lower than expected. This resulted in stronger-than-expected free cash flow, which is more important than operating cash flow because it is cash Apple can ultimately return to shareholders via buybacks and dividends. Apple exited the quarter with roughly $162 billion in cash, equivalents, and marketable securities on the balance sheet. After subtracting $105 billion of debt, we’re left with a net cash position of about $58 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 is returned to shareholders through buybacks and dividends. On that note, Apple announced an incredible $110 billion share repurchase authorization and raised the quarterly dividend by 4%. Management also plans to keep raising the payout annually, as has been the case for the past 12 years. During the reported quarter, Apple paid over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and another $23.5 billion via the repurchase of 130 million shares. Quarterly results Apple’s services sales notched another record, which offset a slight miss in product sales and led to beats on gross and operating income. Products Installed base of active devices across all products and geographies hit a new record. iPhone sales decrease was a difficult comparison from a year ago when Covid-related supply chain issues pushed $5 billion in sales from December 2022 into the March quarter. Adjusting for this, iPhone sales were in line. CFO Luca Maestri, citing research firm Kantar, said the iPhone was the top-selling smartphone in the U.S., urban China, Australia, the U.K., France, Germany and Japan. Mac revenue driven by M3 MacBook Air. Half of MacBook Air buyers in the quarter were new to Mac. iPad continues to face difficult comps as we lap the launch of the M2 iPad Pro and the 10 th generation iPad. Half of iPad buyers in the quarter were new to iPad. The wearables, home and accessories segment was down on a difficult comp from last year, which had the launch of the 2 nd generation AirPods Pro, Watch SE, and 1 st generation Watch Ultra. Nearly two-thirds of Apple Watch buyers in the quarter were new to the product, driving the Apple Watch installed base to a new all-time high. Cook said that more than half of the Fortune 100 companies bought Apple Vision Pro units and “are exploring innovative ways to use it to do things that weren’t possible before.” Maestri added: “We are seeing so many compelling use cases. From aircraft engine maintenance training at KLM Airlines to real-time team collaboration for raising a portion to immersive kitchen design at Lowe’s. We couldn’t be more excited about the special computing opportunity in enterprise.” Services All-time revenue record. Record performance in both developed and emerging markets. 180 bps sequential gross margin expansion on better product mix. Maestri said the record product installed base “provides a strong foundation for the future growth of the services business as we continue to see increased customer engagement with our ecosystem.” New high for both transacting and paid accounts, with paid accounts and paid subscriptions both up double-digit percentage points. Apple now has more than one billion paid subscriptions across the services on its platform, more than double the number from 4 years ago, Maestri noted. June quarter guidance Guidance assumes no worsening of the macroeconomic outlook. Revenue is expected to be up low-single digit percentage points versus the year-ago period, despite a currency headwind of 2.5 percentage points. It would beat the Street’s estimate of 1.5% growth. Services are expected to grow at a double-digit rate similar to the rate seen in the first half of the fiscal year. Services revenues for the first half of 2024 are expected to rise 12.7% versus the year-ago period, exceeding the Street’s estimate of 10.6%. iPad sales are expected to gain double digits year over year, much better than the 5.9% expected on Wall Street. Operating expenses are forecast for $14.3 billion to $14.5 billion, in line with the $14.4 billion estimate. (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. 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