Apple Services Generate Impressive $7.3B in Revenue

in Market Commentary by

Corporate earnings were good enough to drive stocks higher yet again, though once more, volatility was extremely low and absolute moves were small. Apple’s results were the highlight. Phone revenues were strong and remain by far the company’s biggest sales line, but services was the real standout for the quarter, generating an impressive $7.3 billion.

Weekly Returns:
S&P 500: 2,477 (+0.2%)
FTSE All-World ex-US: (+0.8%)
US 10 Year Treasury Yield: 2.26% (-0.03%)
Gold: $1,259 (+1.3%)
EUR/USD: $1.177 (+0.1%)

Major Events:

  • Monday – Vanguard named CIO and former IT chief Tim Buckley as the next CEO.
  • Tuesday – Sprint said it would decide soon if it will pursue a merger with T-Mobile or Charter Communications.
  • Wednesday – Under Armour announced another disappointing quarter and said there will be a 2% layoff of its global workforce.
  • Wednesday – BP announced profit of $533 million and said it can now make money with oil at $47.
  • Wednesday – The Dow passed 22,000, driven by Apple which rose 6% on stronger than expected earnings.
  • Friday – Jurors found Martin Shkreli guilty of three counts related to securities fraud and acquitted him of five others. Infamous for raising prices on drugs while CEO of Turing Pharmaceuticals, he faces significant prison time but will be sentenced at a later date.
  • Friday – Robert Mueller has impaneled a Grand Jury to look more deeply into potential interference by Russia in the 2016 election.

Our take:

Like the market overall, Apple keeps on chugging along. The world’s most valuable publicly traded company released impressive results again this week, especially considering many are waiting until fall to upgrade to the new iPhone. Services revenue grew to $7 billion, out of a total of $45 billion, providing important diversification away from pure hardware. Meanwhile the company’s cash pile keeps growing despite a health share buyback program.

All of this is a great achievement, but it isn’t easy staying on top. A research report being circulated by Ned Davis Research shows that since 1972, owning the largest stock in the S&P 500 would have provided an annual return of around 5% compared to over 10% for the index overall. It is easy to think Apple is “different” than previous leaders, but at the time companies like GE, Exxon, Cisco and even Phillip Morris seemed unstoppable as well. It is easy to forget Nokia was the dominant cell phone maker just ten years ago.

If there was a red flag in Apple’s report, it was slowing sales in China where the iPhone may not be as trendy as it was a couple of years ago. Phones are fashion as much as anything, so it is concerning. But overall, things are good in Cupertino.

Many retail investors have big positions in Apple. For quite a while now, most any move toward diversification has gone unrewarded. But history rarely lies. Owning Apple is fine, but like any investment, its weight in portfolios should be considered. Anything more than 5% can be a big bet and should be taken with eyes wide open and evaluation that looks at more than the last 15 years.

Talk with an advisor about your portfolio diversification

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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