Apple's Q3 Earnings Report; Did Buffett Make A Big Mistake?
A Masterclass From The Pragmatic Investor
TL;DR:
It’s been a truly spooky earnings season, with many household names plunging following their latest fillings.
But Apple (AAPL 0.00%↑), despite facing some short-term headwinds, has managed to deliver a good quarter, and the stock is only down a few points, which is comparatively quite good.
Did Warren Buffett make a mistake trimming down his position?
iPhone sales showed an encouraging trend, service revenues are still accelerating and there may yet be some exciting growth opportunities for Apple.
In this article, I will discuss Apple’s Q3 earnings and provide my thoughts on the stock’s appeal as an investment today.
Expect to learn:
Why The Stock Is Selling Off After Earnings
Why This Quarter’s Earnings Are “Deceiving”
Outlook for Apple’s Revenues
Apple Valuation
Technical Analysis On AAPL
Ultimately, we answer the question; Is Apple A Buy Right Now?
But first, a little bit about me, The Pragmatic Investor
An approach that assesses the truth of meaning of theories or beliefs in terms of the success of their practical application.
That is Pragmatism, and it guides my investment philosophy.
Through many years of analyzing markets, I have found this is what works.
The Pragmatic Investor sticks to what works. The problem is there are thousands of different strategies that CAN work for certain people.
But simplicity is key, and that is why I have narrowed down my investing ethos into three key ideas, which combined create what I like to call, The Pragmatic Investing Pyramid.
Macro, Fundamentals and Technical.
This is the three-pronged approach that has helped me beat markets over the last seven years.
For long-term investing, there’s nothing better than understanding business cycles, macroeconomic trends and geopolitics.
On the other hand, when it comes to short-term moves in markets, the best tool we have is technical analysis.
And not just a specific form of technical analysis but a robust set of tools that can all work in conjunction to help us find great setups.
I actually recently designed my own algorithm, you can see it here:
My Substack is designed to guide investors of all levels in their journey.
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Every week I give a macro update, a technical analysis update on the main indexes and stocks and I cover a stock in-depth, looking at its fundamentals.
Apple Q3 Overview
Apple’s Q3 earnings show some interesting trends that investors will want to keep an eye on.
Sales Growth in Services: Apple’s services revenue climbed to $24.97 billion from $22.31 billion year-over-year, highlighting the success of Apple Music, iCloud, and the App Store in providing steady, high-margin income less reliant on new device sales.
Slight Decline in Product Sales: Product sales dipped slightly from $298.09 billion to $294.87 billion, possibly due to longer device replacement cycles and stronger market competition.
Operating Income and Tax Impact: Operating income rose to $29.59 billion, though net income declined to $14.74 billion, mainly due to higher tax provisions.
Earnings per Share (EPS): EPS decreased from $1.47 to $0.97, indicating reduced short-term profitability. Non-GAAP EPS came to $1.64 since it excludes the one-time charge recognized in the quarter related to the impact of the reversal of the European General Court's State Aid decision.
In summary, Apple’s services growth amid product and tax challenges underscores its resilience.
Apple’s latest sales breakdown reveals some interesting regional and product trends:
Regional Growth: Sales in the Americas and Europe showed strong growth, with the Americas rising to $41.66 billion from $40.12 billion, and Europe increasing to $24.92 billion. However, a slight decline in Greater China suggests potential market challenges.
Product Category Insights: The iPhone remains Apple’s top revenue source at $46.22 billion, continuing its growth. Services also expanded significantly. Meanwhile, minor declines in Mac and Wearables hint at softer demand for these products.
Apple; Macro Outlook
Now, it’s time to apply our Pragmatic investor framework to Apple. Let’s begin by looking at Apple's macro outlook.
The image below will serve to give us a good overview of where and how Apple gets its revenue.
Apple is above all a consumer electronics company, with most of its sales coming from the iPhone. And, as we saw in the earnings release almost half of its revenues come from the Americas segment.
As such, Apple’s fate is strongly tied to that of the US economy.
Well, despite numerous calls for a recession in the US, this has not materialized. In fact, Consumer spending actually accelerated in Q3 of 2024.
Especially when we look at Gen Z and Millenials, across all the income brackets, the propensity to spend is increasing.
It is projected that the market will experience an annual growth rate of 2.90% from 2024 to 2029 (CAGR 2024-2029).
While Apple will not explode in growth, we can expect steady growth in revenues.
Fundamentals And Valuation
Apple stands out as a powerhouse in value creation, driven not just by the iPhone or its AI ventures but by its remarkable return on invested capital (ROIC).
With a 2023 ROIC reaching an impressive 300%, Apple demonstrates exceptional efficiency. Unlike capital-intensive companies, Apple requires minimal assets to generate substantial profits, thanks to lean operations and strategic cash management.
For instance, Apple's fixed assets only make up 12% of its total, and its vendors largely finance the business, resulting in negative working capital. This model enables Apple to generate nearly $100 billion in free cash flow yearly, much of which is returned to shareholders via dividends and buybacks.
It’s important to bear all this in mind when looking at Apple’s valuation.
While the price may not be a bargain, Apple's robust model supports its premium.
Thanks to its operating leverage and large buybacks, EPS is projected to keep growing at over 10% in the next three years.
Technical Analysis
Moving Averages
The 20-day EMA (Exponential Moving Average), at around $187, is acting as immediate support.
The 50-day EMA, around $182.91, is positioned below the 20-day EMA, suggesting recent upward momentum.
The 200-day EMA, at $174.83, acts as a longer-term support, reinforcing the uptrend.
Fibonacci Levels
Key retracement levels are marked, with the 78.6% retracement level at $225.91 currently serving as a resistance level.
AAPL has recently struggled to break past the 78.6% level, indicating a strong area of selling pressure.
Ascending Triangle Pattern
An ascending triangle is visible, typically a bullish continuation pattern. However, the stock is testing the lower boundary, suggesting a potential breakdown if it closes below this level.
RSI and MACD
RSI is at 60.93, near the overbought zone, hinting at strong but possibly overextended momentum.
MACD shows a slight bearish crossover, indicating weakening momentum in the short term.
Seasonality
Seasonality suggests AAPL generally performs well at the end of the year, aligning with the holiday season and product releases.
In summary, AAPL is facing resistance near $225.91 but has strong support at the moving averages. Watch for a breakout above $225.91 or a breakdown below the triangle pattern for further direction.
Is Apple A Buy Right Now?
Apple (AAPL) remains a resilient option despite recent market volatility and slight dips following its Q3 earnings. The company’s services revenue surged, bolstering its margins, while iPhone sales growth highlights ongoing consumer demand.
Although product sales dipped slightly, Apple’s operating model remains robust, generating substantial free cash flow thanks to high return on invested capital and low asset requirements.
Technically, AAPL faces resistance near $225.91, yet strong support levels suggest stability. With projected revenue growth and continued consumer spending, Apple’s premium valuation appears justified. For investors seeking stability, Apple remains a solid buy candidate.
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