It looks like the pre-earnings optimism toward Apple Inc. (NASDAQ:AAPL) was warranted after all.
A week ahead of the Apple earnings report, investors bid up AAPL stock some 5%. And shares were higher again Monday night after Apple earnings beat the Street once again, helped in part by record iPhone sales.
However, that gain is fairly muted — perhaps a telling sign that the easy money is long gone.
Apple Earnings
Apple earnings for the second quarter spiked by 33% to $2.33 per share on revenues that grew 27% to $58 billion. Both figures easily trounced Wall Street expectations for profits of $2.16 per share and sales of $56.08 billion.
The main driver, as it has been, was the iPhone juggernaut.
In the latest quarter, AAPL shipped a staggering 61.2 million units, which beat Street estimates by 3.1 million units. Pricing power didn’t dwindle, either, as overall gross margins hit 40.8%, again beating the consensus forecast of 39.5%.
Apple’s bulging cash flows will make their way down to investors. Apple bumped up its share buyback program by $50 billion to $140 billion, and the dividend on AAPL stock will be bumped up 11% to 52 cents per share quarterly. On current prices, that translates to a 1.6% yield.
Details on the Apple Watch were scarce, but CEO Tim Cook said demand is exceeding supply and that customer response has been tremendous. App developer response has been, too, as Cook claims some 3,500 apps are now available for Apple Watch.
The Apple earnings report did have a few blemishes, however.
For one, iPad sales continue to languish. AAPL managed to ship just 12.62 million units, which was well below the 13.6 million forecast by the Street. Of course, iPad sales likely were at least somewhat cannibalized from the iPhone 6+, which has a larger form factor.
Even the Mac line showed some fatigue, with shipments coming to 4.56 million units. Yet the Street had an estimate for about 4.7 million units.
Should You Buy AAPL Stock?
The problem is this latest iPhone surge can’t last indefinitely — AAPL has ridden a long way on the iPhone 6+, as iPhone buyers enjoy the new form factor, and as mentioned above, pull away from the iPad.
Yes, China is a major driver — overall sales in the country shot up 71% to $16.8 billion — but remember that AAPL still has a worthy competitor in Xiaomi to contend with there, too. Xiaomi has a lot of cachet with customers and has a strong cash hoard, itself. More importantly, Xiaomi typically sells its phones at half the cost of a comparable iPhone — an important factor considering large swaths of the Chinese population make relatively low incomes.
Clearly, pricing wasn’t much of an issue in Q2, but should China see continued deceleration, AAPL stock could face a headwind there.
Moreover, investors should at least have a watchful eye on Apple’s valuation. At a trailing price-to-earnings ratio of 18, Apple doesn’t look particularly expensive. In fact, compared to the Nasdaq-100’s 23, it’s downright cheap.
But relatively speaking, these are high levels for AAPL stock — Apple traded at just 16 times earnings when the bottom started to fall out in late 2012.
In light of heady 60%-plus gains in the past year, it shouldn’t surprise anyone that AAPL shares are up just marginally despite a blockbuster Apple earnings report.
The easy money has been made. From here, gains will be much harder to come by.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
