Apple earnings results keep 'bull thesis alive and well': Analyst

Apple (AAPL) reported third quarter earnings on Thursday, August 1 that beat expectations on both the top and bottom lines. Goldman Sachs Senior Equity Research Analyst Michael Ng joins Yahoo Finance to break down Apple's recent earnings results, as well as the potential impact of the company's AI features.

"Apple ultimately had a very good quarter," Ng notes. Apple's recent results "keeps the bull thesis alive and well, which is really about an earnings acceleration and a step up in normalized earnings power, really supported by the upgrade cycle for the iPhone."

Watch the video above to hear what sort of iPhones Ng thinks will be hitting the markets next.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Mariela Rosales.

Video transcript

Apple shares ticking lower after net sales rose 5% for the quarter.

Thanks to strong results from the company's ipad and services revenue.

Apple's most important business here.

The iphone beat expectations for the quarter but saw a 1% decline from the year prior here to break down the results.

We've Michael who is the Goldman Sachs senior equity research analyst, Michael.

Great to have you here in studio with us this morning.

Thanks so much for having me.

Let's dive into these results.

Uh What, what was your read here?

Any surprises that jumped out at you, especially considering what the broader consumer environment is like right now, Apple ultimately had a very good quarter.

When we look at Apple's results, it beat consensus expectations across all of the key Kpis.

That's revenue, gross profit operating expenses, eps free cash flow and buy backs iphone revenue was down 1% on a reported basis, but it was actually up 2% on a constant currency basis.

Services revenue grew 14% showed continued momentum and the guidance was a little bit better than expected for the September quarter.

Up 5% year over year, they got to services revenue to about 13%.

That implies about 2% products, revenue growth and implies continued iphone strength.

Ultimately, we think this keeps the bull thesis alive and well, which is really about an earnings acceleration and a step up in normalized earnings power really supported by the upgrade cycle for the iphone, Michael.

How big of a game changer?

Do you think these A I features are going to be when you talk about the strong guidance?

What we are expecting here for this next iphone cycle?

I guess more specifically, what do you think that could be usually look like here for Apple?

Yeah, I I'm really excited about the A I features.

They are gonna get rolled out for the iphone over the next couple of years.

Uh In the fall of this year, Apple is gonna start rolling out Apple Intelligence for its iphones and they're gonna expand to more regions and more languages over the course of the subsequent year.

One thing that I think is underappreciated a little bit is that in addition to the A I features that are gonna help drive consumer demand, there are also going to be fairly substantial form factor changes over the next few years.

So for instance, this year, we're expecting the iphone 16 Pro and Pro Max to have a larger screen size.

Next year, there are some press reports about a thinner iphone for the iphone 17.

And the year after that, we're hearing rumors about the potential for foldables.

No, we don't want that Michael.

Come on if you want bigger or thinner or foldable Apple is there for you?

Really?

Ok.

I mean, it seems like Apple is always in this kind of not necessarily full and wait and see, but it's strategy that we've seen from Tim Cook, right?

Wait what the market is, demand, wait to see what the market is demanding and see exactly how much of that market share you could capture, especially given the install base that you already have.

Does Apple need to be first in any of these major investments that they're making right now?

I think when you look at what's happening with A I, it's uh it's really illustrative of what you're just asking about.

You know, I think for the first half of the year, Apple was viewed as this laggard to A I, right?

And after WW DC, I think the markets really change their perception of how Apple fits into the A I landscape.

And to no surprise, you know, people are beginning to adopt the view that Apple is in a really good position to bring A I features to the masses.

I mean, it makes perfect sense that the largest consumer hardware company in the world is going to be the one who brings A I features to most consumers.

You know, Apple's tagline during WW DC where they announced Apple Intelligence was A I for the rest of us and I think that's what's happening here.

You know, we, we, we were so willy nilly to talk about NVIDIA being a $4 trillion.06 trillion, $10 trillion company at some point.

I mean, Apple is the one right now that's sitting at about $3.3 trillion market cap and is now kind of taken back uh or at least gotten more competitive against the likes of NVIDIA.

What are we gonna be talking about Apple getting to a $4 trillion or $5 trillion type of market cap here?

And what would need to happen?

Yeah, I think what we need to see is we need to see a step up in earnings power.

And you know, I think there's been a perception in the market that iphone units are cyclical, mid cycle units were probably closer to 225 million.

Um Our view is that it's gonna steadily step up 250 million plus is the new mid cycle outlook for iphone uh shipments each year and that's really gonna be catalyzed by the A I features and some of the form factor changes uh that will bring up that earnings power and you're gonna have services attached and services momentum to to drive those earnings higher.

Let me go real quick.

There's a lot to like in this report, but China obviously still remaining weak here for Apple.

How big of a risk?

How big of a challenge.

Do you see that being in the in the immediate term?

Yeah, I mean, China was admittedly a little weaker than expected revenue was down about 6.5% on a constant currency basis.

It was down closer to 3%.

What I would highlight though is that the trend is getting better, right?

So if you look at the March quarter, China revenue was down 8% year over year.

If you look at the December quarter, China revenue is down 12% year every year.

So things are definitely getting better in China.

And you know, to be clear, China is always going to be a little bit of a concern.

It's the most competitive market that Apple operates in.

Uh but we think that the trend is improving.