Apple Inc. (NASDAQ:AAPL) was rising more than 5% on Wednesday after the company reported earnings results above analysts’ expectations the day before. The company is not completely out of the woods yet, but things are looking much better for Apple Inc. (NASDAQ:AAPL) investors from middle term point of view.
1. Strong iPhone
The biggest positive takeaway from Apple Inc. (NASDAQ:AAPL)´s earnings release is that the iPhone is selling better that most analysts had anticipated. The company sold 31.2 million units during the quarter, a 20% increase versus 26 million iPhones sold in the same quarter of 2012.
The iPhone is Apple Inc. (NASDAQ:AAPL)‘s biggest and most profitable product, so this has a considerable financial impact on the company. Even more important, it says a lot about Apple Inc. (NASDAQ:AAPL) from a competitive point of view.
has leveled the playing field in mobile with its enormously popular Android operating system, and this has allowed
Strong iPhone sales show that, even if lower cost Android smartphones are gaining market share, Apple still owns the high end segment of the market, and that segment continues providing opportunities for growth.
The average selling price (ASP) of iPhones continued to trend lower this quarter, dropping from $600 to $580 as some consumers choose cheaper versions like the iPhone 4 and 4S over the more expensive iPhone 5. This can have negative effects on profit margins, and it reflects how important pricing has become as the mobile revolution expands into emerging markets.
On the other hand, the fact that older iPhone versions are doing better than expected in the face of aggressive competition from lower cost Android devices is a strong sign about Apple´s brand power and competitive strength.
iPad sales disappointed during the quarter as Apple sold 14.6 million units, a year over year decline of 14%. However, Apple launched a third generation iPad in March of 2012 and no iPad update has been released in 2013, so product cycle seems to be an important reason for the decline. Besides, Tim Cook said that the company reduced its iPad inventory by 1.9 million during the quarter, which would explain more than 79% of the 2.4 million units decline in iPad shipments.
Android tablets have surpassed the iPad in market share during the first quarter of 2013 according to IDC, and Google Inc (NASDAQ:GOOG) announced on Wednesday the new version of its Nexus 7 tablet which sells for $229, a 30% discount versus the $329 iPad Mini. The tablets business is getting more competitive by the day, and cheaper Android models will likely gain market share versus the iPad over the next quarters.
However, Apple is still the undisputed quality leader in tablets, and overall tablet sales continue performing strongly by gaining market share versus PCs, so the recent slowdown is probably just transitory and mostly related to product cycle and inventory reduction.
2. New Products
Both investors and consumers are eagerly expecting new products from Apple and Tim Cook has repeatedly stated that the company will be launching new products, not only new versions of existing products but also new product categories, starting this fall and through 2014.
CFO Peter Oppenheimer said in the last conference call that Apple is “
on track to have a very busy fall
,” and that the company will reveal more in October, when it reports results for its fiscal fourth quarter. It’s not only words, research and development expenditures increased by 34.5% to $1.178 billion in the last quarter, so the company is putting its money where its mouth is.
The rumors about new products from Apple never stop, and it’s impossible to tell what the company will launch and when it will do it. However, if Apple proves that it can sustain growth via product innovation, this would dissipate many concerns about the future of the company after Steve Jobs.
3. Show Me the Money!
Apple accelerated its buyback program in the last quarter; the company repurchased an impressive $16 billion in its own stock. This has a positive effect on earnings per share by reducing share count, and it also saves the company almost $400 million in dividends.
Importantly, implementing an aggressive buyback program is the right thing to do when the stock is undervalued, as the company benefits from buying its own stock when its temporarily cheap.
The accelerated buyback program may be showing that Tim Cook and his management team have plenty of faith in Apple´s coming products, and they believe that the stock is a bargain at current prices. Maybe they are right, or perhaps not, but it’s comforting to know that management thinks that current price levels represent a buying opportunity in Apple.
Bottom Line
The good old iPhone is doing better than expected, and weakness in the iPad is probably just due to temporary factors. New products are coming in the middle term, and management seems to be quite confident in the company´s future judging by the aggressive repurchase program. The case for buying Apple is getting stronger.
Andrés Cardenal owns shares of Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Three Reasons to Buy Apple After Earnings originally appeared on Fool.com is written by Andrés Cardenal.
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