5 optimistic signs and 1 red flag

Apple ( AAPL ) recently released its fiscal third-quarter earnings, revealing a number of positive indicators alongside one notable concern. In this article, we’ll explore five key bullish signs emerging from Apple’s latest results that highlight its growth potential and overall financial strength. At the same time, I will address a red flag that could negatively impact the stock’s investment case. For this particular reason, I remain neutral on AAPL stock despite its otherwise attractive features.

Highlights #1: Revenue continues to hit new records

The first and most apparent highlight from Apple’s Fiscal Q3 report was that the company’s revenue hit a record $85.8 billion, marking a 5% increase over last year. Notably, the figure beat Wall Street expectations by a significant $1.85 billion, despite the company facing a 230 basis point headwind from currency fluctuations.

CEO Tim Cook pointed out that Apple has achieved revenue records in more than two dozen countries, including major markets such as Canada, France and India. Given the prevailing sentiment that Apple’s growth has lagged lately, seeing decent single-digit growth and records across geographies is certainly quite encouraging.

Highlights #2: Accelerating service revenue growth

The second highlight from Apple’s Q3 report is the acceleration in Services revenue growth. Services revenue reached a record $24.2 billion, marking a 14% increase over the previous year and an acceleration from last year’s 8% increase. Services growth contributed to this quarter’s revenue growth noted earlier, while also reflecting strong performance in advertising, cloud and payment services.

In particular, the number of paid subscriptions has skyrocketed to over one billion, with Apple doubling that figure from four years ago. I think the continued growth in service revenue underscores consumers’ increasing reliance on Apple’s ecosystem of services, from Apple TV+ to Apple Music, among others.

Highlights #3: Impressive growth in the iPad and Mac segments

Another highlight revolving around Apple’s growth was related to the iPad and Mac divisions, which saw notable growth during the quarter. iPad revenue rose 24% year-over-year to $7.2 billion thanks to the launch of new iPad Pro and iPad Air models, which feature significant improvements such as the M4 chip and improved AI capabilities. Meanwhile, Mac revenue rose 2% to $7 billion, fueled by the success of the M3-powered MacBook Air.

Sure, demand for Apple devices tends to be cyclical. For example, iPad sales are likely to decline following strong growth this year. However, Apple’s growth in these two divisions highlights its continued appeal in both personal and professional computing.

The story continues

Highlights #4: Customer satisfaction and device install base at all-time highs

Another bullish indicator highlighted by Apple management during the post-earnings call is the company’s outstanding customer satisfaction, as evidenced by its record installed base of active devices. Management reported that its installed base reached an all-time high across all product and geographic segments.

In particular, customer satisfaction scores for Apple products remained extremely high, with the iPhone 15, iPad, Mac and Apple Watch all receiving top ratings. For example, iPhone 15 satisfaction was reported at 98% in the US, while customer satisfaction for the iPad and Apple Watch was 97%.

While these numbers don’t directly reflect Apple’s underlying financials, they do suggest that demand and sales volumes for upcoming device launches should remain robust. Obviously, Apple is expecting very strong sales for the upcoming iPhone 16 launch.

Highlight no. 5: Financial strength and shareholder return

Last but not least, Apple’s third quarter report reminded us of its remarkable financial strength, which allows it to sustain superb returns for shareholders. The company ended the quarter with $153 billion in cash and marketable securities, with net cash of $52 billion. Apple continued to buy back shares at a rapid pace, which was in line with management’s long-term goal of achieving a neutral net cash position.

The company bought back $69.9 billion worth of stock in the first nine months of this fiscal year, up from $56.5 billion last year. The company is currently on track to buy back $100 billion worth of stock for the year. While at Apple’s current huge market cap, even that much translates into a slim buyback yield of just 3%, it’s still likely to support the stock’s upward momentum.

One Red Flag of Apple – Its Rating

Despite Apple celebrating several positive developments in its third-quarter fiscal results, its report revealed the one red flag investors should watch out for — its valuation. The company continued to post notable revenue growth, while earnings per share also rose 10.2% to $1.70. However, it’s hard to justify the 32.3x forward P/E ratio based on this year’s consensus EPS estimate of $6.71 and Apple’s current share price.

Wall Street is confident that Apple can maintain double-digit EPS growth over the medium term, with the upcoming iPhone 16 serving as a major catalyst. This launch could mark the beginning of a new era for Apple as it introduces truly AI-powered smartphones. I’ve explored this topic in more depth in another article, which I encourage you to check out if you’re interested.

However, even with Wall Street’s bullish forecasts, Apple stock currently trades at a strong forward P/E ratio of 20.6 times expected 2027 EPS. In my view, this high multiple could limit the potential of Apple’s future growth, thus hindering its investment.

Is AAPL stock a buy, according to analysts?

Despite the stock’s strong valuation, Wall Street remains relatively bullish on Apple. Specifically, AAPL stock has a consensus rating of Moderate Buy based on 24 buys, seven holds and one sell assigned over the past three months. At $248.78, AAPL’s average price target implies a potential upside of 12.4%.

See more AAPL analyst ratings

If you’re wondering which analyst you should follow if you want to buy and sell AAPL stock, the most profitable analyst covering the stock (on a one-year time frame) is TD Cowen’s Krish Sanka, with an average return of 42 .3% per each. rating and a 91% success rate. Click the image below to learn more.