In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Hidden Gems Canada's David Kretzmann start by discussing the latest report from Cupertino.
Apple (NASDAQ: AAPL) may have slightly missed analysts' targets for iPhone sales, but its profits were $20 billion -- compare that to the $2 billion that had the market so impressed with Amazon.com (NASDAQ: AMZN). The guys consider the reasons behind the mild miss, discuss the company's longer-term outlook and its services segment, and think about what it could do with the ridiculous quantity of cash on its balance sheet. Then they move on to Google's parent, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), which is growing all across the world, though its margins have fallen a bit. But even its great quarter left shares heading lower.
A full transcript follows the video.
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This video was recorded on Feb. 2 2018.
Chris Hill: Apple sold 77 million iPhones in the fourth quarter. That's actually a bit lower than it was a year ago. Shares of Apple falling a bit on Friday, despite the fact, Matty, that as impressive as the nearly $2 billion in profit that Amazon put up, Apple's profits, a whole lot higher than that.
Matt Argersinger: Yeah, this is a totally different business. We're talking about $20 billion in profit. So, a 10X on Amazon. I still think Amazon's going to be a bigger company, believe it or not. You mentioned the iPhone, the number of iPhones sold was down. 77 million is still a staggering number, by the way. But actually, if you look at the quarter, there was one less week in this quarter in 2017 than there was a year ago. And you have to remember the iPhone X didn't come out until early November. Previous new iterations of the iPhone have come out earlier in the year. So, I think there's some catch up there. I'm not too worried about that down 1% number in terms of iPhones sold. Revenue was still up 13% to $88 billion. They did $239 billion in revenue for the full year. That's just an impressive number. And I would be remiss if I didn't say that they have $285 billion in gross cash on the balance sheet. To put that in a little bit of context, Apple could buy Disney and Netflix and still have cash left over. Disney, Netflix, hint hint. But, the numbers here are obviously staggering.
David Kretzmann: I'm going to go out on a limb here. Even though they didn't sell as many iPhones as analysts were expecting, I think Apple's going to be OK. I think this is a case where, Apple didn't miss expectations, the analysts misunderstood Apple, they underestimated the company. But, with Apple, something else to keep in mind is, the CFO mentioned that they're looking to bring their net cash position down to a neutral level. That means, in the coming years, presumably, they'll be investing over $100 billion, whether it's in acquisitions, maybe Netflix, maybe Disney, stock buybacks, increasing the dividend. So, a lot of opportunity there.
Argersinger: Yeah. One more really positive number I want to point out is, the Services revenue side of the business, which we've talked about. Services revenue climbed 18% to $8.5 billion, over $31 billion for the full year. It now counts for about 15% of Apple's total revenue. They also have 240 million paid subscribers for various services in the Apple ecosystem. I just think that's a key number to watch. We know the iPhone is still the main thrust of the business, but as long as that Services business keeps growing, the number of paid subscribers keeps growing, that shows you how sticky the platform is.
Hill: Here's how high expectations have gotten for Alphabet: fourth quarter revenue was up 24%. That's the 32nd straight quarter of double-digit revenue growth. Shares of Alphabet falling 5% on Friday. Eight years, David? Eight years of double-digit revenue growth? That's not enough?
Kretzmann: I didn't know what else Alphabet can do. This was an incredible quarter, as we've come to expect with the company. Revenue up 24%, net income of $7 billion or so for the quarter. And that growth is really coming across the world, whether it's here in the U.S., the Americas as a whole, Asia, Europe, all of those regions are growing 20% plus. They continue to see the headwinds of their search traffic costs, essentially customer acquisition costs, increasing a bit. That's primarily because mobile search is more expensive than desktop search. That's nothing new. You saw total paid clicks across their properties up 43%, but the cost per click, the revenue they're getting per click, down 16%. But, a lot of incredible things here with the business. Still making about 85% of the business from advertising. That's the main revenue driver. But, when you're looking at Google Cloud, their hardware business with more and more devices, YouTube, there's a lot to like.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon and Walt Disney. David Kretzmann owns shares of Alphabet (C shares), Amazon, Netflix, and Walt Disney. Matthew Argersinger owns shares of Alphabet (C shares), Amazon, Apple, Netflix, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.