It wasn't all about the much-debated iPhone, whose sales were still down an uncomfortable 12% year-over-year. It wasn't even all about Apple's (AAPL) - Get Report services, the fast-growing segment whose revenues lagged expectations by $180 million.
The tech company's robust fiscal third quarter results and solid outlook for the upcoming period came on the back of a well-rounded, high-performing product portfolio. Strength was evident in categories that experts often overlook, including wearable devices and a refreshed Mac and iPad lineup.
'Side Hustles' Pay Off
Apple's smartphone business is still undergoing a slow process of recovering from a tough first half of fiscal 2019. Ever since the widely successful launch of the iPhone X, in November 2017, Apple has struggled to maintain sales growth at healthy levels.
This time, the company seems to have taken matters into its own hands, implementing trade-in and financing programs to stimulate demand. The measures appear to have worked particularly well in the struggling Chinese market, which finally experienced revenue growth on a constant-currency basis. Government stimulus in the form of lower taxes also helped, and Apple did not hesitate to turn more aggressive on pricing in order to regain market share in the region.
Services did not impress as much as it had in previous quarters, but the business was negatively impacted by currency headwinds and one-time benefits captured last year. Still, the highly profitable App Store showed impressive performance, growing by double digit percentages across all geographies. Revenues are likely to ramp up in the next few quarters, as services like Apple Card and Apple TV Plus launch ahead of the Fall season.
What looked most impressive, however, were Apple's "side hustles." Outside the core iPhone and services businesses, the company grew revenues by an eye-catching 20% year-over-year, despite currency challenges. The new lineup of Mac and iPad products launched in March must have helped to drive demand in what is typically a slower quarter of sales.
The wearables segment posted outstanding numbers, and contributed to total company top-line growth more than any other product group. The Apple Watch appears to be the top candidate to offset the maturity and inevitable decline of the smartphone category, one that I estimate will produce more than one-third of Apple's total company consensus revenue growth next year.
Not The Same Old Smartphone Company
Through a solid earnings beat and guidance that topped consensus on nearly all key financial metrics, Apple has provided enough reasons to support improved investor sentiment. Better yet, strength seemed broad-based across the different segments and geographies, suggesting that the Cupertino-based company now relies much less on the success of the iPhone to thrive.
In the near term, the market is likely to bid up Apple's stock price, pushing valuations towards a current-year earnings multiple of nearly 20x. This is about as pricey as shares have been in the past two years at least.
But importantly, Apple continues to transition its business towards a higher-margin, recurring-revenue model that takes advantage of its expanding installed base (higher year-over-year in all of Apple's top 20 markets). Slowly being left behind is the more unpredictable hardware-centric model that served the company well in the past.
While Apple's stock may look expensive to some at first glance, I believe the valuation premium is fully supported by the quality of the company and the evolution of its business model. As a result, and following a robust earnings report, Apple looks to me like a high-conviction buy at current levels.
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The author has no positions in any stocks mentioned in this article.