The last time I talked about Apple (NASDAQ:AAPL), it was to highlight the innovative culture that I think will continue to drive AAPL stock higher for the foreseeable future.
But now I want to revisit the Cupertino, California-based tech giant to talk about something just as compelling — Apple’s ability to grow even during the teeth of what appears to be a burgeoning global recession.
It’s not every company that can manage to sustain a growth rate during a recession, but I’m banking on Apple to confound expectations. Because this is much more than a smartphone company. And it has already shown that its shrugging off the effects of the novel coronavirus pandemic and getting back to business.
The business of making money, that is.
A Bullish Call on Apple
Bank of America analyst Wamsi Mohan is projecting Apple’s revenue to sink by only 2% in the first quarter of 2020, due in large part to the Covid-19 pandemic that erupted in China and spread around the world.
But that’s just a blip. In fact, Mohan believes that AAPL will recover quickly, earning $263.21 billion in revenue in 2020, which would be a 1.2% growth rate even as the U.S. sinks into a recession.
How does that happen?
Part of it is Apple’s diversified nature. While it made its bones on smartphones and computers, Apple has successfully grown its Services revenue in recent quarters to the point that it can help sustain the company even when a pandemic shuts down its factories and grinds supply lines to a halt.
The Services segment, which includes everything from Apple Music, the App Store and Apple News, is critically important to AAPL stock because it’s a high-margin business. Apple charges fees to content developers to sell products on Apple’s platform, so Apple avoids all the R&D costs that affects the bottom line of its computer, wearables and smartphone businesses.
In fact, Apple actually enjoys a higher profit margin from its Services segment than it gets from its entertainment division or its popular smartphones.
It was the Services division that got a special shout-out from CEO Tim Cook when the company reported its fiscal second-quarter earnings last month.
“Despite COVID-19’s unprecedented global impact, we’re proud to report that Apple grew for the quarter, driven by an all-time record in Services and a quarterly record for Wearables … In this difficult environment, our users are depending on Apple products in renewed ways to stay connected, informed, creative, and productive.”
For the quarter, the company reported earning $13.3 billion from its Services segment, which was up 16% from a year ago. The company earned revenue of $58.31 billion for the quarter overall, with earnings per share of $2.55. That beat analysts’ expectations of $54.54 billion in revenue and EPS of $2.26.
Production Is in High Gear
While companies in the U.S. are still inching toward reopening, Apple’s supply lines have already returned to normal in China, Mohan says.
Foxconn, which is Apple’s top iPhone manufacturer, announced in mid-March that it was back to full production, and Apple’s production levels returned to normal in China by the end of March.
That means Apple should be able to launch its newest iPhone, featuring 5G technology, by the end of the year. I’ve made no secret about the importance of 5G technology, so this is a development I’m really looking forward to.
Renderings of the phone indicate this the next iPhone will include the biggest design change since the iPhone X in 2017, and that should also trigger plenty of iPhone sales.
Apple’s incredible employees were already able to launch new iPad Pro and MacBook Air models in the most recent quarter while working from home, so I have no doubts that the 5G smartphone will be out by the end of the year.
The Bottom Line on AAPL Stock
Apple is an extraordinary company. Boasting a market capitalization of $1.3 trillion and a net cash position of $83 billion, it is uniquely positioned to handle the economic downturn, no matter how long it lasts.
While other companies struggle, AAPL is maintaining its commitment to shareholders by returning value. In the most recent quarter, Apple had $18.5 billion in stock buybacks and issued $3.4 billion in dividends. The company also announced a new $50 billion buyback authorization.
The dividend, while small at 1.1% yield, also got a 6% boost and has now been growing for seven consecutive years.
Apple stock is a strong buy in my Portfolio Grader tool, where it continues to earn an ‘A’ grade.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
