It has been quite a week in tech: There were disappointing results from Alphabet (GOOG: GOOGL), Meta (META), and Microsoft (MSFT) that prompted double digit losses in those stocks. Elon Musk finally completed the purchase of Twitter (TWTR), with a number of senior executives immediately being let go. Then after the close yesterday, Amazon (AMZN) beat on the bottom line but missed on revenue and, more importantly, issued much weaker-than-expected Q4 guidance and its stock dropped close to fifteen percent. AMZN has regained some ground this morning, but as I write this before the open, it still looks likely to open around twelve percent lower than it closed yesterday.
That is a lot of headline material, so it is no great surprise that Apple’s (AAPL) results, which were roughly in line with expectations and didn’t contain any gaudy or spectacularly disappointing guidance, went relatively unnoticed. However, in the context of what is happening everywhere else, the solid-looking Q3 that came out of Cupertino can be seen as extremely good.
I know that the pessimists are focusing on iPhone sales that were a little light, but is that really a surprise when the quarter included only a few days of sales of the iPhone 14, one of the most eagerly-anticipated upgrades Apple has offered for a while? Not really, especially given that the new model’s release was restricted by supply issues. The fact that despite those challenges, they reported beats on both the top and bottom lines is indicative of something important that the market seems to be overlooking right now: Apple is no longer a one-trick pony.
The increasing importance of revenue and profits in the high margin services business enables them to smooth out the cycle of iPhone sales as new models are anticipated and released, and in light of that, there is one thing mentioned by Tim Cook in the analyst call that has more significance than many analysts seem to allow for. That is an increase the number of what are known as “switchers,” people who switch from Android to Apple devices.
Bringing new people into the Apple ecosystem means increased recurring, high-margin revenue in the future. Consumers can be fickle, so I guess they could switch back, but one of the things that Apple has been best at over the years is retaining those customers once they make the switch, so it is fair to assume that more iPhone users will equate to more services revenue for a while to come. Given that, the good quarter in terms of Mac sales is also a positive in this earnings release if we assume that some of those are new to the Apple ecosystem.
And yet, the market was noticeably underwhelmed despite big drops in the two days leading up to the release:
One can only assume that the weakness was in sympathy with the bad quarters from big tech and the falling stocks that accompanied them, but that makes little sense either, for a couple of reasons.
First, as I have pointed out many times in the past, Apple is no longer a tech company. They are more like the modern equivalent of Westinghouse or Maytag, a seller of “appliances” that we all feel we need to own just to function normally. Second, at least part of the weakness in mega cap tech companies like META and GOOG was down to Apple itself, which implemented new privacy policies that weakened the data collection side of these other businesses. It makes no sense to punish Apple’s stock for weakness in tech companies to which they themselves contributed.
The sympathy drop in AAPL this week already looked like a buying opportunity for those reasons. Now that they have reported beats on both revenue and EPS, even in the face of a big forex headwind that presumably won’t last forever, and the stock has barely reacted, it looks even more like one.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
