• Apple Q3 revenue and earnings beat expectations
• Services revenue reaches new record high
• Excitement around Apple Intelligence debut grows

Strong Overall Performance

Apple (AAPL) released its third-quarter earnings report on Thursday reporting its best-ever June quarter by earnings and revenue, both exceeding expectations. Apple remains the most profitable company in the U.S., earning approximately $97 billion in net income in the 2023 fiscal year, despite slower growth compared to other tech giants.

Key product segments, especially services, showed robust growth, reaching a new all-time high. While iPhone sales saw a slight dip, the anticipation for the upcoming Apple Intelligence software could spur a new wave of upgrades. Despite challenges in the Chinese market, Apple remains optimistic about its future growth prospects.

• EPS: $1.40 vs. $1.35 estimated, growing 11% YoY

• Revenue: $85.8 billion vs. $84.5 billion estimated, rising 5% annually

iPhone Sales

iPhone remains Apple’s most significant business, contributing 46% of the company’s total sales for the quarter. Sales of iPhone improved in the third quarter, falling only 0.9% vs. expectations of a 2.2% drop. However, iPhone revenue saw a slight decline of 1% year-over-year.

• iPhone Revenue: $39.30 billion vs. $38.81 billion estimates

Services and Other Product Lines

Apple’s services division, which includes hardware warranties, cloud storage, and content subscriptions, delivered a substantial 14% growth.Apple experienced significant growth in its iPad division, with sales increasing nearly 24% year-over-year. This surge was driven by the release of new iPads during the quarter, which triggered a wave of upgrades.

• Services Revenue: $24.21 billion vs. $24.01 billion estimated

• iPad Revenue: $7.16 billion vs. $6.61 billion estimated
• Wearables, Home, and Accessories Revenue: $8.10 billion vs. $7.79 billion estimated

• Mac Revenue: $7.01 billion vs. $7.02 billion estimated

Forward Guidance

Apple anticipates a similar 5% overall revenue growth in the fourth quarter. The company expects its services division to maintain a growth rate of approximately 14%, consistent with the pace of the previous three quarters. Operating expenditures are projected between $14.2 billion and $14.4 billion. The gross margin is forecasted to be between 45.5% and 46.5%.

Sales in China Remain a Challenge

China is Apple’s third biggest market and sales in the region declined by 6% to $14.72 billion, significantly improving from the 8.1% decline in the second quarter, and well below estimates of $15.7 billion drop. This is the fourth consecutive quarter decline in sales.

The company had discounted several of its iPhone models as it faced fierce competition from local brands like Huawei, which offer much cheaper smartphones and have been eroding Apple’s market share in the region.

Surge in Apple Stock Following AI iPhone Announcement

The company introduced Apple Intelligence, a suite of AI products and services, at its developer conference in June. The company revealed plans to integrate OpenAI’s popular generative AI chatbot, ChatGPT, into Siri, the iPhone voice assistant. This strategic move is likely to boost sales of Apple’s newest and most expensive iPhones, as the software won’t be compatible with devices older than the iPhone 15 Pro.

The excitement around the announcement of Apple Intelligence triggered 22% surge in Apple shares to a new record high of $237.23 reached in mid-July, pushing the company’s valuation above $3.5 trillion.

Excitement Builds for Apple Intelligence Launch

Apple is set to launch its highly anticipated Apple Intelligence software, powered by generative AI technology, in September. This software is expected to drive a significant upgrade cycle for the upcoming iPhone 16 series, as the advanced AI features will only be available on the latest devices.

To succeed, Apple must ensure that Apple Intelligence offers compelling features that excite customers. The upcoming software upgrade is expected to be one of the most significant in iPhone history. This launch comes amid increased competition, as rivals like Samsung have been quicker to release similar services.

While its still early to assess the impact of Apple Intelligence on iPhone sales in the coming year, we are cautiously optimistic at this point as the necessity for users to upgrade to newer models ensures a push towards the latest devices.

Can Apple live up to sky high expectations?

Following the WWDC event, FY25 expectations for a double digit growth in revenue and iPhone sales pushed Apple’s share price 33% higher. However, achieving such growth trajectory amid fierce competition might be challenging for Apple, as Android in particular might surpass Apple’s offerings in the near-term. While after the launch of iPhone 16 we expect iPhone sales to pick up in the fourth quarter and into 2025, and we remain optimistic about Apple’s long-term outlook, high single digit growth might be more realistic to be achieved.

Source: TradingView

Technical Analysis

Despite dropping 8% from its all time high over the past two weeks amid a general decline in tech stocks, Apple shares are up 17% year-to-date. Following the breakout above $199.10 key resistance back in June, the price action remains constructive and is in a strong up trend.

Despite a robust Q3 result and record revenue, given the 33% rise in the share price since April, market reaction in the short-term might be subdued. Given the current overall market correction which is more severe in tech stock, we cannot rule out further weakness towards $200 – $205 in the short-term.

We see such weakness as healthy and merely unwinding the stock’s overbought momentum conditions. As such, any further share price weakness would present a good buying opportunity. Over the long-term, our view is that current price action is part of wave 3 (out of 5) of the current bull market cycle and we see significant upside potential in the year(s) ahead. Our year end target is $260.

Summary

Apple’s Q3 earnings report highlights strong financial performance, with revenue and EPS surpassing expectations. Key product segments, especially services, showed robust growth. While iPhone sales saw a slight dip, the anticipation for the upcoming Apple Intelligence software could spur a new wave of upgrades. Despite challenges in the Chinese market, Apple remains optimistic about its future growth prospects.