Apple’s Earnings Show Investors Its Strength and Its Weakness

Key Points

• Apple stock is up after a double beat and a whopping $110 billion share buyback.  
• However, the report is also telling for what it lacks – that is, clarity about the company’s direction on AI. 
• The upcoming developer’s conference will set the short-term outlook for AAPL stock.  

Apple Inc. NASDAQ: AAPL stock is up more than 6% after the company announced a whopping $110 billion share buyback authorization. In addition to the buyback, Apple rewarded shareholders with a 4% increase to its quarterly dividend. Shareholders of record as of May 13, 2024, will receive a 25-cent per share dividend on May 16, 2024. That makes it 12 consecutive years of dividend increases for Apple. 

Apple isn't alone among technology stocks when it comes to rewarding shareholders with buybacks. The amount of the buyback is a reminder that Apple is a cash-rich company. But if you've been waiting for Apple to announce the next big thing, particularly as it comes to AI, you'll have to wait a little longer.  

Overall, the earnings report was better than expected. Apple beat analysts' expectations on the top and bottom lines. Revenue of $90.8 billion narrowly beat estimates of $90.6 billion. The company also posted earnings per share of $1.53, which beat expectations of $1.50.  

But Apple critics, of which there are many, will point out that revenue was lower year-over-year. And although the company saw year-over-year growth in Services, it wasn't enough to offset a decline in iPhone sales. The bears will also claim that a $110 billion buyback (with interest rates near 5%) is a desperate attempt to hide the company's lack of a growth plan.  

Making a Call on the iPhone Isn't Clear 

As expected, investors were keenly interested in the company's iPhone sales. The iPhone makes up 52% of Apple's revenues. So, while the company is branching out into other areas, the iPhone will continue to drive stock price growth in the foreseeable future.  

Apple reported a decline in iPhone revenue. However, the revenue of $45.96 billion was only slightly lower than the forecasted $46 billion. Part of that was because the 8% sales drop in China was not as bad as forecasted. 

The more encouraging news from China is that Apple believes there's evidence the bottom may be in. And worldwide, approximately 25%-30% of Apple's iPhone base haven't upgraded their devices in over three years. 

Of course, it's fair to ask why those users haven't upgraded. And the resilience of the consumer suggests that it's hard to play the inflation card. What's more likely is that iPhone owners believe there haven't been sufficient feature enhancements to justify the $1,000 price tag.  

The Company's AI Position Remains Undefined 

The other area that investors wanted to hear from Apple was artificial intelligence. From 2017 through 2023, Apple has purchased over 20 AI startups. That goes against the argument that Apple has nothing better to do with its cash. But the company has still not launched its own large language model (LLM), which is another reason that consumers are holding off on upgrading their iPhone.  

This is a story that has many layers. Apple is not known for being first in areas like AI. One reason for the delay in this case is the company's plan to develop its LLM for local access (i.e., on-device) on its iPhone 18. That's different from the cloud-based setup that most companies currently use. Apple will also want to ensure that iPhone users can still get the privacy features they've come to expect when AI is added to the iPhone. It's a big reason why Apple is fighthing back against the DOJ lawsuit to protect its walled garden.  

Another reason is that Apple gets paid to grant access to its iOS. In 2022, For example, Alphabet Inc. NASDAQ: GOOGL paid Apple $20 billion to be Safari's default search engine. They'll be paying that and more to ensure that Google Gemini will work on Apple's iOS system. 

Don't Like AAPL Stock, Wait a Month 

Apple will host its Worldwide Developer Conference (WWDC) in June. This conference has historically been the time when Apple releases its latest innovations. The company has traditionally been deliberate when it comes to innovations. However, investors are getting nervous. 

With that in mind, every year seems like it's the most important WWDC ever. It may actually be the case this year.  

The buyback announcement will keep AAPL stock propped up. Early analyst reaction shows price targets moving higher than the consensus. But if Apple is going to justify the lofty price projections of those analysts, they'll have to do more showing and less telling.