Apple Is No Longer #1

On October 28^th, Apple Inc AAPL delivered fiscal fourth-quarter results that lagged estimated for the first time in years. As if this wasn't enough, a day after, Microsoft Corporation MSFT passed Apple, becoming the world's most valuable public company. At market close on Friday, Microsoft had a market cap of nearly $2.49 trillion at market close, topping Apple's $2.46 trillion. Despite revenue growth of 29% that most companies would find very solid, Apple stock sold off in after-hours action, losing as much as $125 billion in market cap right before the earnings call.

Fiscal Fourth-Quarter Results

During the quarter ended on September 25^th, revenue increased 29% on an annual basis and every product category grew on an annual basis. Net sales amounted to $83.36 billion, below the estimated $84.85 billion. It still increased 29% YoY.

iPhone revenue was up 47% YoY and amounted to $38.87 billion but still fell short of analyst expectations that stood at $41.51 billion. Then again, the quarter included only a few days of iPhone 13 sales.

Services revenue grew more than Apple itself had expected. It was up 25.6% YoY as it amounted to $18.28 billion, exceeding the estimated $17.64 billion.

Other products' revenue amounted to $8.79 billion, exceeding the $9.33 billion estimated, an 11.5% YoY increase. What's most important is that the segment that includes the Apple Watch and AirPods grew without new products which went on sale in October.

Mac revenue was up only 1.6% YoY as it amounted to $9.18 billion, below the estimated $9.23 billion. But sales of new MacBook Pro models were announced in October so their impact will be seen in the undergoing quarter.

Despite being supply-constrained, iPad revenue expanded grew 21.4% YoY as it amounted to $8.25 billion, exceeding the estimated $7.23 billion.

The supply constraints were driven by the industry-wide chip shortages as well as COVID-related manufacturing disruptions in Southeast Asia." We had a very strong performance despite larger than expected supply constraints, which Apple estimates to be around $6 billion. Earnings per share amounted to $1.24 whereas gross margin stood at 42.2%.

Fiscal 2021

Annual revenue was up 33% from 2020 to $366 billion, reflecting massive growth as sales of iPhones, iPads, and Macs exploded during the pandemic.

CEO Tim Cook said that Apple has 745 million paid subscriptions, accounting for both first-party services like Apple Music as well as subscriptions through Apple's App Store, up 160 million YoY.

Outlook

Apple didn't disclose any official guidance since COVID-19 started taking the world hostage 18 months ago. However, Cook did say that the company expects "solid YoY revenue growth" with the December quarter expected to be the company's largest in terms of revenue despite even worse supply constraints that will take more than $6 billion from its revenues. For the undergoing quarter, CFO Luca Maestri expects only iPad sales to decline YoY due to supply constraints while other product categories should continue growing. In the undergoing quarter, Covid related manufacturing disruptions have improved greatly over the past month but the chip shortages linger on.

Takeaway

Apple was the first publicly traded U.S. company to reach a market cap of both $1 trillion and $2 trillion and last July, it got the title of the world's most valuable company. But Microsoft topped Apple in market cap both last year and now. Investors simply became used to Apple delivering impressive earnings beats over the past few years, and especially during the pandemic, which is why the most recent revenue miss must have felt like a cold shower. It is merely a reminder that the future is promised to no one, even Apple who owns Steve Jobs' legacy. Steve Jobs raised everyone's game and under Tim Cook's leadership, Apple continues being the yardstick of excellence that inspires everyone else to raise their game.

Under the Hood, It's Nothing Short of Impressive

Despite all the supply chain issues, revenues still climbed 29%, compared to 2020. Gross margin increased substantially, and operating expenses were controlled. If a few below-the-line items that investors don't care much so about were exempt, another EPS beat would be in Apple's cards. This quarter is merely the first time since April 2016 that the tech titan has failed to beat earnings estimates, and the first time since May 2017 that its revenues have missed estimates, according to Refinitiv data.

But, Apple's performance is still nothing short of impressive.

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