Apple (NASDAQ:AAPL) came out with its quarterly earnings report after the bell on Tuesday. The company beat on earnings, but was somewhat light on revenues as well as forward guidance. The stock is trading pretty flat in today's market.
I am not surprised that the shares are doing very little as the result of this quarterly report. Q2 earnings are usually the weakest of the year for this tech titan, and none of the three major catalysts that will drive the stock price higher for the rest of the year were contained in the report; nor were they expected to be.
Let's take a look at the positives from the earnings report and then refocus on those three catalysts to set the stage for the stock for the rest of 2014.
- The company posted earnings of $1.28, five cents above the consensus.
- Gross margins improved 250bps year-over-year to 39.5%, thanks to cost cuts and a greater portion of overall sales coming from iPhones. That was above guidance of 37% to 38%.
- Software & Services (App Store & iTunes) revenue was up 12% Y/Y to $4.5B *Wish company would break out App Store revenue separately*
- Thanks to the recent distribution deal with China Mobile (NYSE:CHL), iPhone revenue jumped 28% Y/Y in the Middle Kingdom to $5.9B.
The most astonishing factoid from the earnings report was that Apple's cash balance, despite massive stock buybacks (the company bought back $5B in stock in the quarter) and increased dividend payouts, continues to increase an impressive pace. Net cash and marketable securities grew almost $14B for the quarter to over $164B (~84% of its offshore). How many companies even have $14B in profits in one year, let alone see free cash flow like this in one quarter?
Obviously, the most important positive catalyst will be the launch of the iPhone 6, which will include the much anticipated larger screens. According to The Wall Street Journal, Apple has pre-ordered 70 mm to 80 mm iPhone 6 units. This is substantially above the pre-orders for the 5S/5C launches last summer and Apple's biggest initial run ever for a product.
This reflects Apple confidence in the demand for the larger screens this device will include. I believe Apple will be proved right in its projection, as the larger screens will open new customer bases (including this author and his old eyes, who still has a Samsung Galaxy only because of its larger screen). It is also crucial to reigniting growth in the saturated North American market, which only grew 1% Y/Y, excluding retail, this quarter.
The second catalyst will be the launch of product in a new category. This is crucial for the long-term growth of this tech titan. Most speculation is centering around something in the wearable technology arena, like an "iWatch". This launch should generate considerable buzz and could boost the stock if the product gets good reviews.
Finally, there is the matter of what Apple is going to do with its Fort Knox hoard of cash. Look for additional increases to both the company's stock repurchase authorization, as well as another increase in the company's dividend by the end of the year; both of which will be positive for the shares.
Wildcards could include some movement in a repatriation tax holiday in Congress, which would benefit Apple greatly - a long shot, at best. The other wildcard could be a significant acquisition. Since Apple is getting more into the enterprise space, a bold move to acquire BlackBerry (NASDAQ:BBRY) could move the needle in this space.
All in all, it was a solid, not spectacular quarter for Apple. Several positive catalysts lay ahead in the back half of 2014. My opinion that the stock reaches $105 a share by year-end remains unchanged. ACCUMULATE.
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.