Apple Earnings - When Really Good Just Isn’t Good Enough

Key Points

• Apple delivered a solid earnings report highlighted by a record quarter for iPhone sales revenue. 
• AAPL stock dipped over 1% after the release as investors began to debate the stock’s valuation.
• Apple Intelligence is bringing AI to the edge, which may be what sets the company apart yet again.  

Apple Inc. NASDAQ: AAPL delivered a double-beat in its quarterly earnings, including posting a record quarter for iPhone sales revenue. However, AAPL stock dropped over 1% following the report. It seems that while the report would be considered very good, it wasn’t good enough for analysts who were coming in with expectations of great for many technology stocks. 

Great may have to wait a few quarters. But this was still a solid report. Earnings per share of $1.64 on revenue of $94.93 billion beat analysts’ expectations for $1.60 EPS on revenue of $94.58 billion, even better when broken out across product categories: 

• iPhone sales came in at $46.22 billion, higher than the $45.47 expected and up 5.5% year-over-year (YOY) 

• Mac sales came in at $7.74 billion, up 1.7% YOY. 

• IPad sales were $6.95 billion, up 7.9% YOY but missed expectations.  

However, the company missed on revenue for its “other products” category, which includes the Apple Watch. The company also reported lighter-than-expected sales in China. The $15.03 billion was less than the $15.8 billion expected. Plus, although Services revenue was up 11.9% YOY, the $24.97 billion missed expectations for $25.28 billion.  

After several quarters when the company’s Services business carried Apple, a miss may concern investors. But ultimately, this report was all about the early reports on Apple Intelligence and what it may mean to the iPhone refresh cycle.  

AI On the Edge 

Apple was criticized for being a late entry to the AI game. But with the release of Apple Intelligence, the company has entered the fray. And it’s doing so in a way that is likely to allow it to monetize AI faster than other companies.  

That's because most AI is being developed in the cloud and housed in data centers (many of which aren’t built yet). By contrast, Apple Intelligence puts AI on the edge. That is, directly on the device.  

Consistent with other Apple products, Apple Intelligence can span the entire Apple ecosystem. That includes the company’s new line of iMac’s, which feature a new M4 chip that is designed to handle AI tasks.  

In an interview with CNBC, Tony Fadell, a former Apple executive and cofounder of Nest Labs, remarked that AI on the edge may lack a little of the rich experiences that can come from the cloud, but users can get it quickly, inexpensively, and privately on their Apple devices.  

Investors Want to Know if Apple Intelligence is Really Smart 

The criticism of Apple Intelligence to date is that it has a lot of style but not much substance. But that’s not inconsistent with the way Apple has always operated. 

This is a story that will develop over the next several quarters as the developer community begins to create apps using Apple’s proprietary APIs. Once those apps become available, the belief is that it will fuel a refresh cycle for the iPhone 16. It’s also important to note that Apple Intelligence will also be available on the iPhone 15 Pro and Max devices.  

That's significant because, in remarks prior to the earnings report, chief executive officer (CEO) Tim Cook remarked that the strength of the iPhone sales was not limited to the iPhone 16. The company is also seeing an increase in sales for the iPhone 15’s that could accept Apple Intelligence. And both were stronger than the sales of the 14 and 15 in last year’s cycle. 

The AAPL Trade is Back; Buy Any Meaningful Dip 

AAPL may be a Hold for long-term investors, the sell-off could offer trading opportunities on a stock that is never short of liquidity. Apple stock was already down over 1% for the day heading into the report. In after-hours trading, AAPL stock has dipped to around $221. If it fails to hold that level, investors could see the stock drop to $212.

Priced at just under 31x forward earnings, nobody will confuse AAPL stock of being cheap. Nevertheless, a key reason for that valuation is the company’s Services business, which accounts for nearly 25% of the company’s revenue. That's why a miss a miss on revenue may have spooked investors on Halloween, keeping them from staying long before Friday's jobs report. 

However, any meaningful dip would be an ideal entry point for long-term investors as the stock is now about 10% below its consensus price target.