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What's going on?

Apple reported a better-than-expected quarterly update late on Tuesday, and its stock’s initial record high might be giving the tech giant delusions of grandeur.

What does this mean?

Apple’s total revenue and profit for the quarter beat investors’ expectations, which was a good start. But investors were more impressed by its iPhone sales, which were up by a better-than-expected 50% on the same time in 2020 despite the impact of chip shortages last quarter (tweet this). That matters because the more of Apple’s smartphones in the world, the more hope the company has of driving users into the arms of services like Apple TV+, Apple Music, and the App Store. And it seems to be doing okay so far: sales from its services segment were up a higher-than-expected 33%, which – given that services are much more profitable than cost-heavy hardware – helped Apple’s profit beat forecasts too.

Why should I care?

The bigger picture: Smartphones are forever.

Apple’s clearly feeling confident about its iPhone’s chances: the company just asked its suppliers to help boost iPhone production by 20% this year, bringing the total to 90 million units. That might’ve settled the nerves of skeptics who were worried by recent earnings announcements from Asian chipmakers TSMC and Hon Hai. Their semiconductors are an essential part of the smartphone ecosystem, but neither of their updates seemed promising for the devices: the former posted a potentially worrying drop-off in smartphone revenue, while the latter’s consumer electronics unit was the slowest-growing among its three main divisions.

Zooming in: There’s growth in services. 

Apple’s top priority is to make money from subscriptions to its services, whose higher margins have a bigger effect on earnings and cash flow than sales of iPhones or Macs. The company generated just under $33 in average per-user services revenue last year, and it could double that by earning $5.50 from every user every month. That’s not impossible considering people pay more for services like Spotify and Netflix, and it could add at least another 20% to Apple’s valuation.

Originally posted as part of the Finimize daily email.

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