Apple Earnings: What Should You Look For?

Key learning points

  • Analysts estimate earnings per share of $1.01 versus $0.65 in Q3 FY 2020.
  • Services revenue is expected to grow YOY at a healthy pace.
  • Company-wide revenue is expected to grow at a brisk pace amid heightened scrutiny by antitrust regulators and critics.

Apple Inc. (AAPL) has recently seen some of the fastest earnings and revenue growth in recent years. But that stellar growth could slow if Congress passes legislation that would break Apple’s tight control over which apps users install on their iPhones. These apps are a major driver of the company’s burgeoning service revenues. Apple is also on the defensive in Europe, where it is accused of antitrust violations for requiring rival music streaming apps to sell content using Apple’s own in-app payment system.

Investors will be closely monitoring Apple’s current financial performance and how these antitrust measures could affect the company long-term when it reports after-market earnings for Q3 FY 2021 on July 27, 2021. Apple’s fiscal year 2020 ended on September 26, 2020. Analysts expect robust growth in both earnings per share (EPS) and revenue, albeit slower than the high pace recorded in the previous quarter.

Investors will also focus on another key metric: Apple’s services revenue. The iPhone maker has long been known for its hardware products, such as smartphones and computers. But it is aggressively pursuing a higher margin, less seasonal, service-based revenue, reducing its reliance on hardware sales. Analysts expect Apple’s services revenue to grow at a healthy pace, albeit slightly slower than in the previous quarter.

Apple’s stock has outperformed the broader market over the past year. The share’s rise since last summer was characterized by wide price swings. Part of the price gains in the second half of 2020 disappeared between the end of January and the beginning of March 2021. But the stock recovered and reached a new high earlier this month. Shares of Apple have delivered a total return of 50.9% in the past year, well above the total return of 33.8% of the S&P 500.

Source: TradingView.

Apple Earnings History

Apple crushed analysts’ earnings per share and revenue in the second quarter of 2021. Earnings per share rose 118.6%, while revenue grew 53.6% compared to the same quarter a year ago. It was the fastest growth rate for both metrics in at least 15 quarters. Amid strong results for the quarter, Apple announced it would increase its shareholder payouts. The company’s board of directors announced a 7% increase in the dividend on its common stock and approved a $90 billion increase in its existing share repurchase program.

Shares of Apple fell after the first quarter 2021 earnings report, despite beating analyst expectations. Earnings per share were up 34.6% compared to the same quarter a year ago, the fastest pace since Q4 FY 2018. Revenue grew 21.4%, reaching a new quarterly record. It was the fastest increase in at least 14 quarters. Apple noted that international sales accounted for about 64% of total revenue for the quarter.

Analysts expect another strong performance in the third quarter of 2021, although growth is expected to slow compared to the second quarter. Earnings per share are expected to grow 55.7% as revenue is expected to grow by 23.2%. If Apple comes close to those growth rates, the strong performance in the first three quarters of the year is expected to deliver the fastest annual EPS and revenue growth rate in at least five years. Analysts predict earnings per share will rise 58.4% for all of FY 2021, while revenue is up 29.7%.

Apple’s top stats
Estimate for Q3 2021 (FY) Q3 2020 (FY) Q3 2019 (FY)
Earnings per Share ($) 1.01 0.65 0.55
Yield ($B) 73.5 59.7 53.8
Service Revenue ($B) 16.3 13.2 11.5

Source: Visible alpha

The most important statistic

As mentioned, Apple’s services revenue will be an important metric that investors will focus on. The services include the company’s digital content stores and streaming services, such as its various App Store platforms, Apple Music, Apple Arcade, Apple News+ and Apple TV+. Apple also generates revenue from AppleCare services, advertising services, cloud services, and other services, including Apple Card and Apple Pay. The company first started focusing on its services business in 2015, when iPhone sales growth started to slow down. Profit margins on the sale of services are significantly greater than on Apple’s hardware profit. That means every dollar of added service sales increases Apple’s profits disproportionately compared to hardware sales. But Apple is in a position to defend some of that lucrative revenue from services. In addition to proposed antitrust laws and charges from government regulators, Apple is also facing a lawsuit from video game maker Epic Games Inc. about similar issues related to content distribution control. If costs continue, Apple may need to give its users more access to third-party apps on its devices, which could take a bite out of the revenue and profits from its services.

Apple has maintained healthy service revenue growth in recent years, although that growth is slowing. In FY 2017, annual service revenue grew 34.3%. That pace slowed to 21.6% in FY 2018, then to 16.5% in FY 2019 and again to 16.2% in FY 2020. However, growth is starting to accelerate in FY 2021. Service revenues were up 24, 0% in the first quarter of the year before accelerating to 26.6% in the second quarter. Analysts expect services revenue to rise 24.0% in the third quarter of 2021. For the full year 2021, analysts forecast Apple’s services revenue to grow 23.4%, which would be the fastest pace since FY 2017.