Apple Does It Again and We're Increasing Our Price Target

Apple's (AAPL) closely watched quarterly results came in ahead of top and bottom-line expectations last night led by better-than-expected iPhone, Mac, and Wearables revenue as well as stronger margins. Here's how its results stacked up by segment:

• iPhone revenue of $71.6 billion vs. the $67.5 billion estimate
• Mac revenue $10.8 billion vs. the $9.5 billion estimate
• iPad revenue $7.25 billion vs. the $7.8 billion estimate
• Wearables revenue $14.7 billion vs. $14.0 billion estimate
• Services revenue $19.5 billion vs. $19.7 billion estimate
• Gross margin for the quarter was 43.7% versus 41.6% estimate4

Exiting the quarter, the company's active install base of devices was 1.8 billion, and over the last year it added 165 million paid subscriptions, bringing its total to 785 million paid subscriptions.

From a revenue perspective, the Services business now accounts for just under 16% of overall revenue and likely a larger share of its profits. As that business continues to grow and account for a larger piece of Apple's overall revenue and profit mix, we suspect the conversation will return to how to better reflect it in the valuation accorded to AAPL shares.

Generally speaking, subscription business models offer predictable revenue and cashflow and tend to be far more insulated during economic downturns. As such, they tend to receive a premium valuation. We expect to revisit this in future quarters.

While Apple did not offer formal revenue guidance, it shared expectations for "solid" revenue growth in the current quarter but signaled the rate of revenue growth will be less than the 11.3% booked in the December quarter. Heading into the company's December-quarter earnings, the consensus view called for Apple's revenue to rise 1.4% year over year and given its comments for the quarter we will see revenue expectations move nicely higher.

Also lending a helping hand to its bottom line will be prospects for slightly higher-than-expected gross margins for the current quarter. Apple telegraphed supply-chain issues would have a greater impact during the December quarter compared to the September one, and that was confirmed last night but the company also shared that it sees those issues easing in the current one. In our view, that alongside a better mix of products helps support its gross margin target of 42.5%-43.5% for the current quarter vs. the 42.2% consensus forecast.

In response to the above, we expect to see EPS expectations for Apple move higher today and early next week, and for price targets to nudge higher as well. We're doing that too, raising our price target to $200 from $190, which keeps our "One" rating intact.

As we move through the December-quarter earnings season, we'll look to revisit the quarterly guidance from Apple partner Taiwan Semiconductor (TSM)  , which shared the typical seasonal drop from the December quarter to the March one wasn't in the cards this year. We'll be sizing that comment as well as Apple's murky outlook up against quarterly results and guidance from Qualcomm (QCOM) , Skyworks Solutions (SWKS) and Qorvo (QRVO) next week to get another perspective on iPhone expectations for the current quarter.

In terms its balance sheet, Apple ended the quarter with $203 billion in cash, plus marketable securities even after returning nearly $27 billion to shareholders during the December quarter. That capital return took the form of $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. And on the topic of dividends, Apple's Board declared a cash dividend of $0.22 per share payable on Feb. 10 to shareholders of record as of Feb 7. This will be the fourth such dividend payment at that level, which means we'll be on the lookout for a potential dividend increase in the coming months.

Action Alerts PLUS is long AAPL and SWKS.