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Technology behemoth Apple (AAPL Free Apple Stock Report) has reported good results for the second quarter of fiscal 2017 (ends September 30th), though not good enough, it seems, to fend off a modest wave of profit-taking on Wall Street. (The Dow component, notably, has rallied more than 50% over the past year.) Share net of $2.10 for the period came in $0.09 ahead of our estimate and $0.08 above the consensus view, thanks mainly to a strong gross margin performance. But revenues (of $52.9 billion) were a tad lighter than expected, as iPhone momentum slowed ahead of the highly anticipated 10th anniversary smartphone edition that is rumored to be launching in the fall.

During the March interim, the tech giant shipped 50.8 million iPhones, just shy of the consensus estimate of closer to 52 million units. iPhone demand remains healthy, however, with especially brisk sales being seen for the large-screen 7 Plus model that retails at high price points. (This is a big reason why the gross margin has enjoyed such strength lately.) Moreover, Apple looks to be gaining share in the premium smartphone segment, which suggests that the iPhone 8 will usher in a very profitable upgrade cycle.

The one soft spot has been China, where the iPhone faces stiff competition from several local OEMs, like Oppo, Vivo, and Huawei, which are aggressively marketing high-end devices across the country. Much of the weakness likely stems from currency headwinds, however. And Apple's long-range prospects in China remain bright, with the company continuing to build out its store network there. The iPhone 8, too, may help Apple regain some of its lost momentum in China, since the upcoming device will likely feature a large edge-to-edge display that is more suitable for eSports and other video games, popular pastimes in that key market.

Another highlight from the March quarter includes Apple's services business, which grew 18% on a year-over-year basis (revenues topped $7 billion) and is on track to double in size by 2020. Advances in this high-margined segment are being fueled by brisk App Store sales and benefits from the company's rich developer community. Apple is also making a deeper push into the realm of digital content (it's investing in music and films), where it hopes to wrest some market share from heavyweights Netflix (NFLX), Amazon.com (AMZN), and Spotify. And newer services, such as the digital wallet platform Apple Pay, are gaining traction, auguring well for the future.

All in all, it was a fairly solid quarter for Apple, with the “return to growth” story still very much intact. We are shaving a nickel off our fiscal 2017 share-earnings call, to $9.10, to reflect the modestly weaker iPhone sales. But we are raising next year's bottom-line estimate by $0.30, to $10.45 a share, as we have more confidence that the iPhone 8 replacement cycle will be quite powerful. 

Investors, meanwhile, stand to enjoy Apple's generous capital return program, under which the company plans to return $300 billion to shareholders by the end of March, 2019. As part of this, the quarterly dividend has been hiked by 10.5%, from $0.57 to $0.63 a share. The heightened payout adds to the appeal here, making this large-cap technology issue a fine choice for conservative investors with an eye toward 2020-2022. Indeed, we think that low-risk buy-and-hold investors would do well to continue building positions in the stock at current levels.


About the Company: Apple Inc . is one of the world’s largest makers of PCs and peripheral and consumer products, such as the iPod digital music player, the iPad tablet, the iPhone smartphone, and the Apple Watch, for sale primarily to the business, creative, education, government, and consumer markets. It also sells operating systems, utilities, languages, developer tools, and database software.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.