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Apple Just Crushed Earnings: 3 Things Investors Need to Know

Apple (NASDAQ: AAPL) has been in the news a lot lately. The company announced second-quarter earnings last week, crushing Wall Street's expectations across the board. And this came on the heels of its spring launch event, where Apple unveiled a range of new and updated products. Add in the iOS update with new privacy controls that have some companies complaining. Then there's the global semiconductor shortage, which threatens several industries, including consumer electronics.

Given the whirlwind of headlines surfacing daily, it's easy to lose track of what actually matters. To simplify the situation, here are three things investors need to know about Apple right now.

1. Apple's products are in high demand

Product revenue surged 62% year over year in the second quarter, driven by strong demand across the iPhone, iPad, and Mac product lines. In fact, Mac computers set an all-time revenue record. During the earnings call CEO Tim Cook said: "The last three quarters for Mac have been its best three quarters ever."

Man sitting in front of a new orange iMac.

Image source: Apple.

Cook attributed this success to the M1 chip, Apple's custom-built silicon introduced last year to replace Intel processors in the Mac Mini and MacBooks. Notably, the ARM-based M1 delivers 3.5 times faster CPU performance and twice the power efficiency of previous Mac generations.

Moreover, according to JPMorgan analyst Samik Chatterjee, the M1 chip could also reduce the cost of production by $75 per unit. In other words, Apple's silicon delivers a better experience for consumers, while reducing expenses for the company.

Going forward, that dynamic could make Apple more profitable. Some evidence of that can be found in the fact that product gross margin jumped 100 basis points in the second quarter, reaching 36.1%. But that figure may get even bigger in the coming years. That's because Apple recently debuted a new lineup of M1-powered iMacs and a 5G-enabled iPad Pro (also with an M1 chip) at its spring launch event in late April.

Investors should pay attention to the gross margin on Apple's hardware in the coming quarters to see if these new devices drive cost efficiencies.

2. Apple's services business is gaining momentum

Apple's services business also delivered all-time record results in Q2, as year-over-year sales growth accelerated to 27%. While that figure isn't as dramatic as the 62% uptick in product sales, it still bodes well for the future.

Services revenue comes at a much higher gross margin -- roughly 70% in the last quarter. In other words, as Apple services gain traction -- think the App Store, Apple TV+, Apple News+, Apple Arcade, and Apple Music -- the company will become more profitable as a whole.

Three iPhones displaying Apple Fitness+ screens: workouts for pregnancy, workouts for older adults, and workouts for beginners.

Image source: Apple

To drive growth, Apple is continuing to expand its offering. For instance, it just added more than 30 new games to Apple Arcade, bringing the total to over 180. It also updated Apple Fitness+, bringing new workouts and trainers to the platform.

Going forward, Apple plans to continue investing in its services business. It gives the company another way to monetize its global installed base of over 1.65 billion devices, and the revenue is much less cyclical than product sales. Investors should pay attention to the company's success here.

3. The semiconductor shortage may be an opportunity

Over the last year, the COVID-19 pandemic sparked demand for PCs and smartphones as consumers transitioned to remote work. That, combined with residual effects of the U.S-China trade war, has triggered a global semiconductor shortage. Today demand far exceeds supply, and experts think the situation may take two years to resolve.

Samsung recently warned investors that mobile sales and profits are likely to fall in the next quarter, citing semiconductor supply as one of the drivers behind that trend. Apple also referenced the situation, noting that supply constraints would have a $3 billion-to-$4 billion impact on revenue next quarter. However, Apple CFO Luca Maestri said this headwind would primarily affect the iPad and Mac.

In other words, Apple iPhones may fare better than Samsung smartphones in the near term. How is that possible?

Apple is famous for its supply chain management. The company's Supplier Code of Conduct details the high standards suppliers must meet, addressing everything from ethics to environmental impact. As a result, research firm Gartner has ranked Apple's supply chain as the best in the world for the last seven years.

If Apple is able to use that advantage to deliver strong iPhone sales next quarter, it could help the California company take market share from Samsung -- as it did in 2020.

Smartphone Market Share

2019

2020

Apple

14%

16%

Samsung

22%

20%

Data source: Canalys.

Investors should pay attention to this situation as it unfolds. Management will almost certainly provide commentary on the supply shortage at the end of the next quarter.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2023 $57.5 calls on Intel, long March 2023 $120.0 calls on Apple, short January 2023 $57.5 puts on Intel, and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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