Stock Market

Apple (NASDAQ:AAPL) has surged 40% year-to-date, garnering a “buy” rating from analysts, with an updated target price of $187.73. In the consumer electronics sector, Apple has continued to remain the dominant force, providing continued innovation in key areas many view as the next profit centers for the company.

The company has historically generated value through brand positioning and innovation. These factors are expected to drive long-term wealth creation, making AAPL stock a prime choice for dividend growth. Robust cash flow, record services revenue, wearables sector growth, and AI device investment support this outlook. 

Apple’s Q4 Numbers

Apple reported its fourth consecutive quarter of declining year-over-year sales with $89.5 billion in revenue for the three months ending September 30, nearly in line with analysts’ expectations. However, net income grew by nearly 11% to $22.96 billion, surpassing projections.

Apple’s shares declined over 1% in after-hours trading following the earnings report. CEO Tim Cook mentioned an uneven macroeconomic environment but highlighted ongoing investments in the company’s future.

Product segment revenue decreased over 5% year-over-year  in the September quarter, driven mainly by Mac and iPad sales declines. However, iPhone revenue increased by 3% YoY to $43.8 billion, setting a September quarter sales record. Apple also reached a record number of actively used devices across all products and regions.

The sales figures might hint at iPhone 15’s performance, as some analysts were concerned about minimal upgrades. However, the iPhone 15 launched only eight days before the quarter’s end, with its true impact to be seen in the holiday quarter.

Apple unveiled upgrades to computers earlier. While some analysts expressed doubts about the iPhone 15 cycle, Cook stated it’s too early to make predictions on upgrade and switcher rates. A 2.5% year-over-year drop in China sales raised concerns about Apple’s position in that market.

Apple Expands Its Services

In contrast to Apple’s slight 1% revenue decline in fiscal Q4, its services revenue surged by 16% year over year. While services represent 25% of total sales, they contribute significantly, comprising 39% of gross profit because of a substantial 71% gross profit margin. 

The broad-based growth in Apple’s services segment is clear in the all-time revenue records achieved in various service categories. This includes App Store, advertising, AppleCare, iCloud, payment services, and video. The strength underscores the importance of Apple’s services business, as highlighted by CEO Tim Cook during the fiscal Q4 earnings call.

It’s Hard to Bet Against Apple

Apple’s Q1 revenue guidance appeared flat year-over-year, but it’s more positive than it seems. The upcoming Q1 has one less week than the previous year, which added seven percentage points to last year’s revenue.

Excluding this extra week, Apple’s guidance shows 7% growth. This is noteworthy, given the challenging economic environment marked by inflation and high interest rates.

Apple’s services segment, demonstrating robust and sustained growth, is expected to continue providing double-digit growth, significantly contributing to earnings. With this strength, there’s potential for Apple’s services business to represent over half of the company’s profit. 

The combination of a loyal customer base and substantial net cash holdings justifies the stock’s current valuation. While there are inherent risks such as underperformance in the services business or stagnant sales growth, prospective investors should conduct thorough research before investing.

On the date of publication, Chris MacDonald has a LONG position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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