【2024.10】How to evaluate the performance of apple in October 2024? Keep an eye on these 4 key points for the long term.

As one of the largest companies in the US stock market, $Apple (AAPL.US)$ it has always been a focus of market attention, and its business performance is even more crucial.

Apple will announce its latest earnings after the market closes on October 31. Each time the company releases its earnings, it may also imply a good trading or investment opportunity. Before that, investors need to understand how to interpret its earnings.

How should we interpret Apple's earnings? Apple has always been like a guiding light in the US stock market, with very stable operation. Although the latest earnings changes may affect short-term stock prices, the impact on its long-term trend may not be significant. Therefore, we may need to pay more attention to several key points in its earnings from a long-term logical perspective. This mainly includes its foundation, moat, growth points, and dividends.

1. Base

To focus on a company's long-term development, we must first understand its business foundation. As long as the foundation is stable, the overall performance will not be poor, and the stock price will also have some support.

Apple's foundation undoubtedly lies in its mobile business, including iPhone sales and market share. Why?

Firstly, iPhone sales revenue accounts for over half of Apple's total revenue;

Secondly, about 20% of the business is also based on the Apple system and App Store.

Thirdly, Apple's wearable device business, etc., are also penetrating based on mobile phone users.

So how to judge whether Apple's mobile phone user base is stable or not? It mainly depends on the trend of its market share. If the market share can maintain growth, it indicates that its user base is expanding, otherwise, the business foundation is shaky.

In the Futu app, we can see the trend of Apple's mobile phone market share. We can see significant changes between each quarter, due to the timing of Apple's phone releases, which also experience seasons of slow and peak sales.

We compare the sales peak season of Apple's mobile phones in the fourth quarter of each year, we can see that from Q4 2019 to Q4 2023, Apple's mobile phone market share has increased from 19% to 23%, and its mobile phone base has continued to improve.

However, with the resurgence of high-end models from Huawei and the strong sales of Xiaomi's latest flagship, Apple's market share has been significantly impacted. Apple's global market share in 2024Q1 is about 17%, a drop of nearly 4 percentage points compared to the same period last year. This may be an important reason for Apple's stock price falling more than 10% in the first quarter.

Following this setback, Apple then implemented a price reduction policy and announced the integration of AI functions in new models, enhancing market expectations for Apple's future phone sales. After a major adjustment in stock prices, Apple's stock rebounded strongly and hit new highs. In the 2024Q3 quarter, Apple's market share reached around 18%, a slight increase from the same period last year. Going forward, we can observe whether Apple can stabilize its market share and return to its former glory.

2. Moat

The long-term competitiveness of a company depends on how deep its moat is. The deeper the company's moat, the greater the competitive barriers, the less competitive pressure, and the easier it is to maintain sustainable development in the industry.

Many people believe that Apple is one of the companies with the deepest moat, its competitive barriers come from the technical advantages brought by self-developed chips, and also from the IOS ecosystem of integrated software and hardware. The concept of a company's moat is actually a relatively abstract idea, but in terms of performance, there is an indicator that can reflect it, which is gross margin.

The stronger the competitive advantage of a company, the stronger its bargaining power with customers, and the higher its gross margin. Apple's gross margin in the hardware business represented by the iPhone has remained around 35% for most of the past few years, plus higher-margin software services, maintaining an overall gross margin of around 40%.

What is this concept? According to institutional statistics, in 2022, Apple's mobile phones accounted for 18% of the market share, but captured 85% of the industry's operating profit, making it a profit machine.

For observing Apple's moat and competitive advantage, we can also continue to monitor Apple's gross margin level. As long as the gross margin can be maintained at around 40% or higher, it indicates that its moat may still be relatively solid. Otherwise, if the gross margin narrows, it may bring pressure to the stock price. Apple's gross margin in the previous 6 fiscal quarters has been over 44%, with a slight upward trend, which may mean that its moat is still relatively solid. We can continue to observe whether Apple's latest fiscal quarter can maintain a high gross margin level.

3. Growth Points

If Apple's foundation and moat are like 'defending the key points,' then its potential growth is like 'conquering new territories.'

In the existing hardware business, Apple's growth potential is relatively limited. For example, in the mobile phone market, except for special cases in fiscal year 21, Apple's mobile phone revenue has remained stable for most of the past few years.

Therefore, Apple's normal growth source mainly relies on service revenue, including commission revenue from the app store, channel advertising revenue from Google, and subscription service revenue.

For a long period of time in the past, Apple's service business revenue growth rate has been maintained at above 10%, even exceeding 20% at one point. The proportion of total revenue has also increased from less than 10% to about 20%. In the first two quarters of the 2023 fiscal year, Apple's service business revenue growth rate slowed significantly, with a year-on-year increase of only 6.4% in Q1 of 2023 and a further decline to 5.5% in Q2 year-on-year growth rate.

However, starting from the 2023 Q3 fiscal quarter, Apple's service business revenue growth rate gradually stabilized and rebounded year-on-year. In the Q3 fiscal quarter of 2024 fiscal year, Apple's service revenue was about $24.2 billion, a year-on-year increase of 14.1%, maintaining double-digit growth for four consecutive quarters. In the upcoming latest fiscal quarter, we need to observe whether its service business revenue growth rate can remain relatively high.

In addition to existing growth points, Apple's future growth expectations also come from potential growth brought by new product lines, such as the head-mounted display Vision Pro released by Apple in the second half of 2023. However, the head-mounted display was not launched until early 2024, and its current performance is average. We need to observe the subsequent version optimizations to see if it can become a new groundbreaking product.

4. Buybacks and Dividends

Before investors invest in a company, they not only need to pay attention to its performance and competitiveness within the industry, but also need to focus on how friendly the company is to its shareholders. So, how to measure the company's emphasis on shareholders? The simplest and most direct way is to look at its buybacks and dividends.

Company stock buybacks can increase earnings per share, improve return on equity (ROE), and inject additional liquidity into the market, benefiting the stock price significantly. On the other hand, dividends directly distribute the earnings in silver and gold to shareholders, both of these actions are ways to reward shareholders.

How to see buybacks and dividends in the financial reports? The simplest way is to look at the cash flow statement.

In the financing activities cash flow section of Apple's cash flow statement, we can see that Apple's buyback amount has remained high every year, with the buyback amount in the 2023 fiscal year reaching approximately $77.55 billion. The accumulated net buyback amount in the past five fiscal years is nearly $400 billion, unmatched in the US stock market.

In terms of dividends, Apple's overall dividends have increased slightly in the past five years, with cumulative dividends exceeding $70 billion.

Due to the continued high buybacks and dividends, Apple's net assets remain at a low level, and as a result, its ROE is particularly high, reaching 172.0% in the 2023 fiscal year.

Charlie Munger once said that in the long run, stock returns are consistent with a company's ROE. Apple's high ROE has also increased its attractiveness to investors, largely due to sustained share buybacks and dividends.

Therefore, in each new performance report, we can pay attention to the buyback and dividend situation in each quarter. As long as this data remains stable or shows an increase, it is a good signal that can provide a certain level of long-term support for the stock price.

Seeing this, you may have some new insights on how to read Apple's performance. It is worth mentioning that every time a high-profile company releases its performance, it may present a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors feel uncertain about the bullish or bearish direction of a company's performance, but the stock price may experience significant upward or downward volatility after the performance announcement, investors may consider capturing potential opportunities by trading the volatility of its stock price, considering employing a straddle strategy by purchasing both call and put options simultaneously.

In summary:

First, for Apple's performance, the change in the company's phone sales and market share is the foundation of all businesses. If the foundation is unstable, it will not be beneficial to its long-term stock price.

Second, the company's high level of gross margin is a concentrated reflection of its moat. If the gross margin weakens, it may also put pressure on the stock price.

Thirdly, the company's service business is an important growth driver, we can focus on whether it can continue to maintain a high growth rate in the future.

Fourthly, Apple's share buybacks and dividends are important support for stock prices, we can pay attention to the trend of these data changes.

Every time a company releases its earnings, it may bring potential trading opportunities. Investors can consider suitable types of trades based on their individual risk tolerance.