Apple (AAPL) Down 11.7% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Apple (AAPL). Shares have lost about 11.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Apple due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Apple's Q1 Earnings Beat, iPhone & Services Aid Top Line

Apple reported first-quarter fiscal 2021 earnings of $1.68 per share that beat the Zacks Consensus Estimate by 19.2% and jumped 34.4% year over year.

Net sales increased 21.4% year over year to $111.4 billion, which surpassed the Zacks Consensus Estimate by 8.7%.

Services, along with iPad, Wearables and Mac, continued their momentum in the quarter under review. Services (14.1% of sales) revenues grew 24% from the year-ago quarter to $15.76 billion.

Product sales (85.9% of sales) increased 21% year over year to $95.68 billion.

Strong China & Japan Aid Top-Line Growth

Apple achieved double-digit growth and new all-time records in each of its five geographic segments. The company’s installed base of active devices passed 1.65 billion in the reported quarter.

Americas sales increased 11.9% year over year to $46.31 billion and accounted for 41.6% of total sales.

Europe generated $27.31 billion in sales, up 17.3% on a year-over-year basis. The region accounted for 24.5% of total sales.

Greater China sales surged 57% from the year-ago quarter to $21.31 billion, accounting for 19.1% of total sales.

Japan sales soared 33.1% year over year to $8.29 billion, accounting for 7.4% of total sales.

Rest of the Asia Pacific generated sales of $8.23 billion, up 11.5% year over year. The region accounted for 7.4% of total sales.

iPhone Sales Increase Y/Y

iPhone sales increased 17.2% from the year-ago quarter to $65.59 billion and accounted for 58.9% of total sales. The robust year-over-year growth was driven by strong demand for the iPhone 12 family.

Markedly, iPhone’s active installed base is now more than 1 billion.

Apple quoted a recent survey report from 451 Research which stated that customer satisfaction was 98% for the iPhone 12 family in the reported quarter.

Services Momentum Continues

Services maintained momentum in the reported quarter. Apple set quarterly record for the App Store, Cloud Services, Music, advertising, AppleCare and payment Services.

Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+ and Apple One bundle also contributed to overall growth. These new services continue to add users, content and features.

Apple now has more than 620 million paid subscribers across its Services portfolio, up 35 million sequentially and 140 million year over year.

iPad & Mac Jump on Strong Demand

iPad sales of $8.44 billion jumped 41.1% year over year and accounted for 7.6% of total sales. Sales grew strong double digits in every geographic segment, including an all-time record in Japan.

Mac sales of $8.68 billion increased 21.2% from the year-ago quarter and accounted for 7.8% of total sales. The year-over-year growth was driven by strong adoption of the new MacBook Air, MacBook Pro and Mac Mini powered by Apple’s brand-new M1 chip.

Apple quoted a recent survey report from 451 Research which stated that overall consumer satisfaction was 94% for iPad and 93% for Mac in the quarter under review.

Wearables’ Robust Performance

Wearables, Home and Accessories sales increased 29.6% year over year to $12.97 billion and accounted for 11.6% of total sales.

Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers who purchased Apple Watch during the reported quarter were first-time customers.

Operating Details

Gross margin expanded 140 bps on a year-over-year basis to 39.8%. Moreover, gross margin increased 160 bps sequentially due to higher sales and a strong revenue mix.

Products’ gross margin expanded 530 bps sequentially to 39.8%, driven by leverage and mix. Services’ gross margin was 68.4%, up 150 bps sequentially.

Operating expenses rose 11.9% year over year to $10.79 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses which increased 16% and 8.4%, respectively.

Operating margin expanded 220 bps on a year-over-year basis to 30.1%.

Balance Sheet

As of Dec 26, 2020, cash & marketable securities were $195.57 billion compared with $191.83 billion as of Sep 26, 2020.

Term debt, as of Dec 26, 2020, was $107.04 billion, up from $101.56 billion as of Sep 26, 2020.

Apple returned $30 billion in the reported quarter through dividend payouts ($3.6 billion) and share repurchases ($24 billion).

Guidance

Apple didn’t provide revenue guidance, given the uncertainty around the impact of the coronavirus pandemic. However, management expects revenues to grow year over year.

Moreover, Apple expects Wearables, Home and Accessories’ year-over-year growth to decline in the first quarter. Further, Services are expected to face tough year-over-year comparison.

Gross margin is expected to be much similar to what was reported in the December quarter. Operating expenses are expected between $10.7 billion and $10.9 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 5.22% due to these changes.

VGM Scores

Currently, Apple has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Apple has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

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