Apple shares rallied after stellar earnings: What’s next?

Last week, Apple released its fiscal first-quarter 2022 earnings. The shares jumped almost 7% on Friday and have bridged the YTD loss to only about 4%.

Apple started 2022 on a positive note and its market cap hit $3 trillion on the first trading day of the year. The shares tumbled thereafter amid the broader sell-off in growth shares. What’s the forecast for the shares after the stellar earnings report and what’s next for the iPhone maker?

Apple reported stellar earnings

Apple reported revenues of $123.9 billion in the quarter, which were 11% higher than the corresponding quarter last year. The revenues were a new record and the company reported record revenues in all geographies. Within the product categories, only iPad sales fell on a YoY basis in the quarter due to supply chain issues. The company’s iPhone revenues increased 9% to $71.63 billion in the quarter. The sharp rise in iPhone sales looks encouraging as many analysts were apprehensive of the iPhone 13’s sales outlook.

Services revenues rise

Apple’s Services revenues increased 24% YoY to $19.52 billion in the quarter. The Services segment generates a higher margin and in the fiscal first quarter, it reported a gross margin of 72.4%, which was significantly higher than the 43.8% at the company level. Apple’s earnings came as a big respite to tech investors. Prior to this, Netflix’s earnings spooked investors as the guidance was way below expectations. As for Tesla, while the company’s earnings were better than expected, it delayed the launch of new vehicles to 2023 which led to a crash in the shares.

Apple’s installed device base surpassed 1.8 billion in the quarter, which is a new record in itself. Also, it had 785 million paid subscriptions in the quarter, which is another record. These paid subscribers are expected to drive the company’s growth going forward.

Earnings beat estimates

Apple’s EPS increased 25% YoY to $2.10 in the quarter and was ahead of the $1.89 that analysts were expecting. The company returned almost $27 billion to shareholders during the quarter through a mix of dividends and share buybacks. It ended the quarter with net cash of $80 billion. Apple has been looking to lower its humongous cash pile through buybacks and is expected to further increase the pace of share repurchases in 2022.

Apple provided some colour on the guidance

Since the COVID-19 pandemic began, Apple stopped providing quantitative guidance. During its earnings call, the company provided some colour on the outlook for the current quarter.

It said, “We expect to achieve solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints, which we estimate to be less than what we experienced during the December quarter.” The company however expects the sales growth to be lower than what it reported in the fiscal first quarter.

Commenting on the Services business, it said, “we expect to grow strong double digits but decelerate from the December quarter performance. This is due to a more challenging compare because a higher level of lockdowns around the world last year led to increased usage of digital content and services.”

Apple sees financial services as a key long term driver

Several analysts see Apple’s foray into electric and autonomous cars as a key long term driver. However, in response to a question from an analyst on the biggest opportunities for the company, Apple’s CEO Tim Cook listed financial services.

Cook said, “I would say that I think Apple Card has a great runway ahead of us. It was rated to the No. 1 midsized credit carding customer set by J.D. Power and is getting — has fast become people’s main credit card for many, many people.”

He added, “And the growth of Apple Pay has just been stunning. It’s been absolutely stunning. And there’s still obviously a lot more there to go — and because there’s still a lot of cash in the environment.”

The comments are important amid reports that Apple is planning a new service that would let iPhone users accept payments directly without connecting to additional hardware. Last year, there were reports that Apple is planning to enter the fast-growing BNPL (buy-now-pay-later) market.

Apple share price forecast

After Apple’s stellar earnings release and strong guidance, several Wall Street analysts raised its target price. According to the forecast estimates compiled by CNN Business, Apple has a median price target of $190, which is a premium of over 11.5% over current prices. Its highest price target of $215 is a premium of 26.2% over current prices, while its lowest price target of $145 is a 14.9% discount to the current share price.

Of the 44 analysts covering Apple, 34 have rated the shares as a buy or some equivalent while nine analysts have a hold rating. One analyst has a sell rating on the shares.

Apple is the largest holding of Berkshire Hathaway and chairman Warren Buffett regrets selling some of the shares over the last two years. The Oracle of Omaha sees Apple as a consumer products company and has also been supportive of its buybacks. Thanks to these buybacks, Berkshire Hathaway’s stake in the company has risen despite selling billions of dollars worth of shares.

Analysts turn bullish

After Apple’s earnings release, Morgan Stanley’s Katy Huberty raised her target price from $200 to $210. She said, “We believe that [Thursday’s] results will help refocus investor attention on the value of Apple’s ecosystem, and more specifically, user lifetime value.”

Deutsche Bank’s Sidney Ho also raised the target price from $200 to $210. Ho said, “AAPL also saw a ~330bps y/y improvement in Product gross margins, despite the inflationary component pricing environment, and this gives us confidence that consumers are continuing to shift more towards higher cost (and higher-margin) AAPL products.”

Citi’s Jim Suva maintained his target price of $200 on Apple but said that the shares should move higher. “Investors are too negative on Apple stock and view it as a COVID beneficiary that will see demand fall off as society eventually returns to more normalcy. However demand for Apple products and services is materially outpacing supply and when the supply chain normalizes then Apple’s sales and margins will only accelerate higher, in our view,” said Suva in his note.

Should you buy Apple shares?

Apple shares still look like a good buy for the long term. The 5G supercycle is still in action which will help fuel iPhone sales. The Services business is another long-term value driver and Apple continues to grow the business. The shares trade at an NTM (next-12 months) PE multiple of around 27.5x which does not look unreasonable considering the rerating from a gadget maker to a services and software company.

Apple is a cash flow engine and the company has been using the cash flows for share repurchases to drive the EPS higher. The same trend is expected to continue in 2022 as the company looks set to enhance its share buyback program even further.

The company is also investing in the metaverse and is said to be working on its own AR/VR headset which is expected to be launched in 2022 only. Overall, Apple is one share that can be part of your core portfolio given the multiple growth drivers.