Apple was up over +5% on Wednesday morning after reporting strong Q3 results, with revenue and earnings coming in 1% and 4% ahead of analyst expectations.
It also offered a strong outlook for Q4, with its revenue forecast coming in 3% ahead of analyst expectations at the midpoint.
Fundamentally we felt this was a solid quarter, and view the market's upbeat reaction to the results as being largely driven by the strong improvements demonstrated in the Greater China region.
Apple's ability to weather trade tensions with China was a major concern for investors coming into the quarter, but it managed to show a strong recovery there across every one of its product categories, which we think took the street by surprise.
However, what was even more impressive in our view were the developments announced across smaller and less appreciated areas. Notably:
The Wearables, Home and Accessories segment grew an incredible 48% year-over-year, driven by strength in Watch and AirPods.
- While often overlooked because of its relative size within Apple, that's 48% growth in a segment that is larger than 60% of the companies in the Fortune 500. This is the most we've witnessed that segment grow since 2015 - the year the Apple Watch first launched.
Apple Pay also demonstrated exceptional growth, more than doubling its transaction volume from last year to nearly 1 billion transactions per month.
- We believe this impressive performance has plenty of room to run as Apple Pay continues to expand geographically and as its investments in mass transit integration begin driving more habitual consumer adoption.
Last but not least, the Services segment also maintained strong momentum, with double-digit growth being booked across every geographic region.
- With the previously announced Apple Card now slated to be launched in August, and Apple's new gaming and video services just a few months behind that, we are positive on the multiple upside levers in place for Services as it continues evolving into an increasingly important driver of Apple's results.
While the conversation around Apple often centers around the iPhone or China, we think these results help show that going forward, it will increasingly be around the strong consumer ecosystem it's built around its installed base, which Apple has cultivated carefully over the years and is still in the very early innings of harvesting.