2 Reasons Apple Stock Is a Buy Today

Apple‘s (AAPL -0.52%) fiscal fourth-quarter financial results beat expectations but management’s guidance for fiscal Q1 was worse than expected. Analysts have seemed to focus more on the latter instead of the former, even though the tech giant’s earnings per share grew by a double-digit year-over-year growth rate and beat analyst estimates by 5%. Following the report, a number of analysts have lowered their price targets on the stock.

But I’d argue that there were actually two takeaways from the report that should make investors more bullish on the stock.

Here are two reasons I think shares are a buy today.

1. Apple’s guidance is much better than it looks

Going into Apple’s fiscal fourth-quarter update, analysts had expected the tech giant to guide for 5% year over year revenue growth for fiscal Q1. Instead, Apple guided for revenue to be similar to what it was in the year-ago period. This guidance, however, is significantly better than it seems on the surface, as the company’s fiscal first quarter this time around will have one fewer week than it did in the comparable year-ago period. Apple noted in its fiscal fourth-quarter earnings call that revenue from the extra week last year adds a staggering seven percentage points to the quarter’s revenue. That makes for an incredibly difficult year-over-year comparison.

When excluding revenue from the extra week in the year-ago quarter, you could say that Apple is guiding 7% growth — a huge acceleration from the 1% year-over-year decline it posted in fiscal Q4. This outlook is even more impressive considering the current uncertain macroeconomic environment the company is operating in — one in which consumers are pressured by both inflation and high interest rates.

2. Apple is transforming into a high-margin services company

Next, there’s the improving composition of Apple’s business. Total revenue may have slid 1% year over year in fiscal Q4 but Apple’s services revenue rose 16% year over year. It might be tempting to brush this business off since it’s a small part of Apple’s business, at just 25% of total sales. But here’s where Apple’s services business gets exciting: Thanks to its 71% gross profit margin, Apple’s services business accounts for 39% of Apple’s gross profit. So we’re talking about a core Apple business that accounts for 39% of the tech giant’s gross profit growing at 16% year over year.

Further, the momentum within Apple’s services segment is broad-based. “We achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services and video as well as a September quarter revenue record in Apple Music,” explained Apple CEO Tim Cook during the company’s fiscal fourth-quarter earnings call.

This robust and consistently growing business will likely deliver double-digit growth for Apple for the forseeable future, contributing to earnings growth in a big way. Indeed, with growth this strong, there will likely be a day when Apple’s services business accounts for more than half of the company’s profit.

These two underappreciated catalysts, combined with other well-known facts about Apple’s business, like its loyal customer base and its large net cash position, easily justify the stock’s current valuation, in my opinion. Of course, there are risks that Apple’s services business doesn’t do as well as expected or the company’s sales growth never rebounds. Investors, of course, should do their own due diligence before diving in to buy shares.