Apple reported its December quarter results after the market closed on Wednesday and even though they were outstanding, the shares fell the next two days. Expectations were running high for the company as the stock had risen 16% in the six trading days before the announcement, so the drop is probably normal profit taking.

It was almost impossible for Apple to show big enough numbers and not see the stock at least stall, if not fall, as it shares were in an overbought condition. However, the results and positive commentary should set up Apple’s next few quarters to be strong as the iPhone 12 with 5G technology is just starting to rollout. The key question for the stock is will its higher than historical valuation hold at or close to current levels.

Blowout revenue and earnings

Apple easily generated over $100 billion in quarterly revenue for the first time; in fact it was over $111 billion vs. expectations of $103.3 billion. This was a 21% increase from a year ago and the strongest year-over-year gain since the September 2015 quarter’s 22%. The 72% quarter-to-quarter increase was the strongest since the December 2014 quarter’s 77% which was the iPhone 6 and 6 Plus’ first full quarter.

EPS came in at $1.68 vs. the Street’s average forecast of $1.41 and their range of $1.23 to $1.56. The $1.68 was an increase of 35% year-over-year and was against a tough compare of the previous year’s 19% increase.

Gross margins coming in at 39.8% was also very strong. This was a combination of Hardware gross margin at 35.1% and Services at 68.4%. Services gross margin is the highest ever reported and up over 10 percentage points from three years ago (December 2017 quarter’s 58.3%) when the company first started to report them.

Apple’s net cash position increased slightly to $83.5 billion from the September quarter but was down $15.2 billion from a year ago. The company’s largest net cash quarter was December 2017 at $163 billion. At the current rate Apple should achieve its goal of $0 net cash in about three years.

Operating cash flow of $38.8 billion and free cash flow of $35.3 billion were extremely strong. One thing to keep in mind is that any one quarter’s cash flow can be skewed by various factors. It is best to look at cash flows over a multi-year period.

iPhones could have been even stronger                                            

iPhone revenue of $65.6 billion easily beat Street expectations of $61 billion. The blowout number was up 17% year over year and 148% from the September quarter. The strong results seem to be from a combination of greater unit shipments and average selling prices or ASPs also increasing. This result is even more impressive since the first iPhone 12 models weren’t available until October 23, almost a full month into the quarter.

Counterpoint’s Research Analyst, Aman Chaudhary, estimates that Apple was the global smartphone market share leader in the December quarter with explosive 96% growth quarter-to-quarter. He wrote, “The pent-up demand for a new 5G iPhone, strong carrier promotions, especially in the US, and the iPhone 11’s longevity are some of the reasons for this growth.”

For the full year Chaudhary’s analysis shows that Apple moved from the third market share position to second and significantly closed the gap with the leader Samsung.

China revenue exploded

Apple’s revenue in China increased 168% quarter-to-quarter to $21.3 billion. This was the strongest quarter-to-quarter increase in a decade, when revenue was almost five times smaller.

It was also 57% year-to-year growth, which helped drive the company’s total revenue 21% increase. Without China’s strong growth total company revenue growth would have been 15%.

Commenting on the market dynamics, Counterpoint’s Research Analyst Mengmeng Zhang said, “China’s 5G smartphone sales surged with Chinese OEMs aggressively rolling out more value-for-money offerings. The 5G penetration rate became even more pronounced in the December quarter with the launch of Apple’s iPhone 12. 5G smartphones accounted for more than 60% of smartphones sold in China, up from just 5% a year ago.”

Commenting on the competitive landscape, Counterpoint’s Research Analyst Flora Tang said, “Among major OEMs, Apple was the only one to enjoy a positive year-over-year growth in 2020. Apple’s strong growth was due to the debut of iPhone 12 series, which comes with 5G connectivity and models across a wider price range. In addition, thanks to heavy price cuts and promotions, the iPhone 11 series continued to do well even after the launch of iPhone 12’s. The iPhone 11 was the best-selling model on JD.com during the e-commerce festival sales. The impressive growth of both the iPhone 12 and iPhone 11 series helped push Apple’s market share in China to 16% in the December quarter.”