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AAPL Earnings Full of Clues of How Stock Gets to New Highs By David Zeiler

Investors needed to sleep on a deceptively boring earnings report, but by this morning the positive news the company shared in its conference call had pushed Apple Inc. (Nasdaq: AAPL) stock up nearly 3%. Much of that had to do with the iPhone, the Cupertino, Calif.-based company's most important product and the primary catalyst of Apple stock. But investors weren't just reacting to the encouraging iPhone news. The post AAPL Earnings Full of Clues of How Stock Gets to New Highs appeared first on Money Morning - Only the News You Can Profit From .

Investors needed to sleep on a deceptively boring earnings report, but by this morning the positive news the company shared in its conference call had pushed Apple Inc. (Nasdaq: AAPL) stock up nearly 3% today (Wednesday).

Much of that had to do with the iPhone, the Cupertino, Calif.-based company's most important product and the primary catalyst of Apple stock.

Apple NASDAQ: AAPL Jul 23 04:01 PM loading chart... Price: 97.19 | Ch: 2.47 (2.5%)

AAPL investors tend to pay close attention to anything having to do with the iPhone, as it contributes more than half of the company's revenue and about 60% of its profits.

While overall iPhone sales were roughly in line with expectations, strength in several markets, especially China, further raised hopes for the iPhone 6, due in September. With its larger and nearly indestructible screen, that product is looking more and more like a monster hit.

Sales of the iPhone in China jumped 48% in the June quarter, twice as fast as the overall growth rate of that market. Apple CEO Tim Cook said that sales to BRIC countries (Brazil, Russia, India, and China), where cheap phones running Google Inc.'s (Nasdaq: GOOG, GOOGL) Android operating system had previously eaten away iPhone market share, were up 55% year over year.

"China has been terrific for Apple ... but it's not really just about China," Money Morning Capital Wave Strategist Shah Gilani said on the FOX Business "Varney & Co." program today (see video below). "As Tim Cook said, it's really about all the BRIC countries doing very well."

20140723_SG-Varney_Web

And the number of iPhones sold, 35.2 million, was a record for the quarter and a 13% increase over the previous year. And as new Apple Chief Financial Officer Luca Maestri pointed out, these strong sales occurred despite the rumors of the forthcoming iPhone 6. In previous years, iPhone sales have declined more sharply as customers wait for the latest model to debut.

Apart from the iPhone, the AAPL earnings report didn't seem particularly bad or particularly impressive.

Better-than-expected gross profit margins helped AAPL beat Wall Street forecasts. Earnings per share was $1.28 in Apple's fiscal third quarter, easily topping expectations of $1.23.

Revenue came in at $37.4 billion, about $600 million below expectations but a record for Apple's June quarter.

What allowed the beat on the bottom line despite that was a nice surprise in Apple's gross margins, which increased to 39.4% from 36.9% from the same quarter last year.

That's why AAPL stock was flat in after-hours trading last night. It was only after Cook's comments to analysts started to spread that Apple stock started to move higher.

And they weren't just reacting to the encouraging iPhone news...

AAPL Stock Will Get a Boost from the Thriving Ecosystem

As Cook went through the numbers last night, it soon became clear that Apple really is firing on all cylinders right now.

For example, the Mac, the former flagship product that most people have nearly forgotten, had a truly stellar quarter. Mac sales were up 18% year over year in PC market that continues to contract. What's more, Mac sales in China were up 39% while the overall PC market there shrank by 5%.

And the iTunes segment was up 25%. "In fact, for the first nine months of this fiscal year, the line item that we call iTunes software and services has been the fastest-growing part of our business," Cook said.

The iTunes Store and the apps that run on iPhones and iPads are a key part of the Apple ecosystem that keeps customers "in the fold" and buying more Apple products. And Apple's new versions of iOS and the Mac OS, which will integrate more features between the company's mobile and PC elements, will make Apple ecosystem even more powerful.

Even the iPad business, which appeared to lag in the June quarter (sales fell 9% year over year and missed expectations by 1 million units), is likely to be a strong driver of AAPL stock later in the year thanks to the recently announced partnership with International Business Machines (NYSE: IBM).

IBM will create software and cloud solutions that will be loaded on Apple hardware - mostly iPads and iPhones - and sold by IBM's veteran enterprise sales team to businesses, particularly those in retail, healthcare, banking, travel, telecommunications, and insurance.

Cook spoke extensively about the IBM deal in the conference call with analysts yesterday, and his lofty expectations of what it will do for iPad sales.

Cook noted that 99% of all Fortune 500 companies, and 93% of the Global 500, use iPads now, but that penetration in business of tablets is just 20%, compared to about 60% for notebooks.

"We win if we can drive that penetration number I spoke about from 20% to 60%. That would be incredibly exciting here. The walls would shake," Cook said.

While Apple's enormous size means it can't duplicate the dizzyingly high growth rates of several years ago, that doesn't preclude growth, either. It just means the percentages will be lower.

Apple has made a lot of moves over the past year to set up its next stage of growth, which is just getting under way. And that's bound to drive AAPL stock higher - past its all-time high and beyond.

"[Apple's success] is about a lot of things that they're doing right, and I think the stock has a lot higher to go," Money Morning's Gilani said.

Are you optimistic about AAPL's prospects going into the fall? Or do you think the company's strategy will falter? Let us know on Twitter @moneymorning or Facebook.

UP NEXT: There's still another catalyst for AAPL stock that is just now gaining traction, but unlike the iPhone and iPad this has received very little attention. Yet it's a technology that could change the very way people shop and interact with businesses. It's called iBeacon...

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The post AAPL Earnings Full of Clues of How Stock Gets to New Highs appeared first on Money Morning - Only the News You Can Profit From.

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