Apple Inc. (AAPL) – the largest American tech company released its Q1 2020 earnings report on Tuesday, which drove its stock price to a new record high of $327.25 per share on Wednesday.

Before we analyze the key reasons for investors’ optimism, let’s take a closer look at some of the key highlights of AAPL’s first-quarter results.

Apple Q1 2020 earnings

In the first quarter of fiscal 2020 (ended December 28, 2019), Apple reported $4.99 adjusted earnings per share, up 19.4% on a year-over-year (or YoY) basis. The company’s first-quarter earnings were better than Wall Street analysts’ estimate of $4.55 per share.

Apple’s December 2019 quarter earnings were also significantly higher than its adjusted earnings of $3.03 per share in the September 2019 quarter. Since it won’t be fair to compare holiday quarter results with the previous quarter, I would largely ignore the sequential growth numbers while analyzing the company’s Q1 financials.

The company’s solid services segment performance, along with improved growth in its product segment, helped it report solid first-quarter earnings.

Improved iPhone sales

In the last few quarters, Apple’s declining iPhone sales have raised concerns for its future growth prospects. In contrast, in the first quarter of fiscal 2020, the company reported a strong 7.6% YoY iPhone sales growth. In December 2019, quarter, iPhone sales generated $55.96 billion in revenue for Apple as compared to $51.98 billion in December 2018 quarter.

In its Q1 2020 earnings conference call, Apple CEO Tim Cook highlighted “exceptional demand for the iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max.”

“iPhone 11 was our top-selling model every week during the December quarter, and the three new models were our three most popular iPhones,” Cook said during the conference call.

Apart from strong home market demand, Apple iPhone witnessed handsome growth in the UK, France, Singapore, Brazil, China, India, Thailand, and Turkey in the last quarter.

Weakness in Mac and iPad sales

Despite improved iPhone sales in the holiday quarter, Apple’s Mac and iPad sales disappointed. The company generated $7.16 billion in revenue from Mac, down 3.5% YoY. At the same time, its iPad sales tanked by 11.2% YoY to $5.98 billion.

Cook called it “a very exciting quarter for Mac” as the company recently launched 16-inch MacBook Pro, among other additions in Mac lineup. However, Apple CFO Luca Maestri shed some light on the reasons that affected Mac and iPad sales during the quarter.

“Both products had a difficult year-over-year comparison due to the launches of MacBook Air, Mac mini and iPad Pro during the December quarter a year ago, and the subsequent channel fill,” Maestri said.

Interestingly, after receiving consumers’ complaints at a large scale for the faulty butterfly keyboard in the previous generation of MacBook notebooks, Apple finally shifted away from the butterfly keyboard mechanism with its new 16-inch MacBook Pro – launched in November 2019.

The new 16-inch MacBook Pro has largely received a positive response from expert tech reviewers.

Robust growth in Wearables, Home and Accessories segment

In Q1 of its fiscal year 2020, Apple reported robust 37.0% YoY growth in its wearables, home, and accessories sales to $10.01 billion. It was the first time when the segment’s quarterly revenues crossed $10 billion mark.

Apple’s wearables attracted strong demand from all its key geographical markets. Its CFO Maestri revealed during the conference call that the company “experienced some product shortages due to very strong customer demand for both Apple Watch and AirPod during the quarter.”

Consistent strength in Apple’s services segment

In a last couple of years, Apple’s services segment revenue has been one of the key growth drivers and the last quarter was no different. In the first quarter of FY 2020, Apple’s services segment revenue rose by 16.9% to a record high of $12.72 billion.

This record revenue figure was primarily driven by a strong performance of Apple Music, cloud services, and Apple Pay.

In the fiscal year 2020, the company aims to double its fiscal year 2016 services segment revenue. In FY 2019, Apple’s services segment revenue was at $46.29 billion, up 90.1% as compared to $24.35 billion in FY 2016.

That’s why it won’t be surprising if the company easily exceeds its goal of doubling its FY 2016 revenue in the ongoing fiscal year.

Apple Q1 2020 results: key financials updates

Here are the key financial updates from Apple’s December 2019 quarter.

Total sales rose by nearly 9%

In Q1 2020, Apple’s total sales rose by 8.9% YoY to $91.82 billion. This sales figure included 7.7% and 16.9% positive YoY growth in the company’s overall products and services segments, respectively.

Services segment profit margin expanded

While Apple’s product segment gross margin remained nearly flat in the first quarter, its services segment margin expanded. In Q1 2020, the company generated $ 27.03 billion gross profit from its product segment – resulting in a 34.2% margin as compared to 34.3% in Q1 2019.

Whereas Apple’s gross profit from the services segment was at $ 8.19 billion with a 64.4% margin in the first quarter of fiscal 2020 – much better than 62.8% a year ago.

As a result, Apple reported $35.22 billion in total gross profit in the first quarter with a 38.4% margin. It was better than the company’s total gross margin of 38.0% in Q1 2019.

A double-digit rise in operating expenses

in the last quarter, the iPhone maker’s total operating expenses rose by 11.1% to $9.65 billion on a year-over-year basis.

A significant 14.1% YoY rise in Apple’s research and development expenses in Q1 2020 was the key reason for a jump in its total operating expenses. In December 2019 quarter, Apple spent nearly $ 4.5 billion on research and development as compared to $ 3.9 billion in December 2018 quarter.

Apple’s consistent focus on maintaining a good quality of its products, along with its efforts to launch new innovative products, continue to keep its R&D expenses significantly high as compared to its peers.

Apple’s massive cash pile continued to grow

Nonetheless, Apple’s massive cash pile continued to rise. At the end of December 2019 quarter, the company had $207.06 billion cash in hand as compared to $205.90 billion at the end of the previous quarter.

Why Apple stock touched new heights

Having looked at its key financials now, let’s summarize what could be the main factors that drove Apple stock to a new record after its first-quarter results.

It’s easy to say that Apple stock is trading at record highs as it reported positive year-over-year earnings growth in the first quarter. However, we must remember that the market is always forward-looking and investors tend to act on information that hints towards a company’s future growth prospects.

I believe a good recovery in Apple’s product segment sales was one of the most important factors. It reflects the company’s ability to regain strength in the smartphone market despite the temporary weakness in the previous quarters.

Apple’s solid services segment results were another great news that could have driven investors’ optimism. But the intense competition in the services segment including cloud services, payment services, and video streaming services, could increase Apple’s challenges going forward.

As of January 28, Apple stock has already risen by 8.2% year-to-date after gaining 55% in 2019. Conservative investors might want to refrain from buying the stock at these levels due to its current high valuation.