Earnings Analysis: Apple (AAPL)
A quarter late, I'm finally writing my first review of Apple quarterly earnings. The company reported their fiscal first quarter of 2018 on Thursday beating on top and bottom lines. The company reported revenues of $88.3B and earnings of $3.89. This results in a solid beat of expectations on the top line of $86.48B and a slight beat on earnings expectations of $3.86. These results culminate in the best quarter ever for earnings and revenue for the company. All this said, not everything was seen as great or perfect in the quarter. IPhone sold 1% less units than that compared a year ago and mac units were down 5%. IPad sales were up 1%. Services grew 18% year over year. It's worth noting that all of these numbers are built off of the fact that there was one less week this fiscal year than last.
This is the crux of where all of the chaos around this stock is based. Essentially, it seems analysts were expecting some sort of "supercycle" because of the company selling both the iPhone 8 and iPhone X this season. Recently there have been a lot of concerns getting raised about the company not selling as many units as expected and how they've likely reached maximum saturation and things are only going to get worse. Add on top of that forward guidance, which was below expectations in terms of revenue and gross margin, and you have a recipe for downgrades all over the place - which is what has been happening. Prior to the announcement, you had numerous downgrades and price target reductions. Then after the announcement we had more on Friday. All of this is resulting in a correction in the stock's price.
It's important to note that my thesis for investing in this stock had nothing to do with expectations of a "supercycle" in iPhone sales. Everywhere I look, despise it though I may, you don't see people getting rid of their iPhones. Young people want the new ones to take better pictures (I think the animoji marketing ploy for the iPhone X is nothing more than a sad gimmick and haven't seen proof otherwise). Heck, even my parents are looking at getting an iPhone, as much as that grinds on me. So sales are going to continue to happen as people will regularly recycle their phones every 2-3 years on average. You also still see more growth and penetration in China, which is the real story for unit sales.
More importantly are a couple other factors. First is one of the reasons that I picked up the stock, which falls in line with a renown pundit, regarding the fact that Apple has turned more into a consumer goods company in electronics. They sell the phones, sure, but it's becoming the services and the growth we're seeing there that is a major factor. It's the recurring fees and charges from those services that are akin to the razor/razor blade concept that consumer goods companies thrive on for long-term survival. Product loyalty only adds to the ability to those services to grow. Add on top of that a large cash pile that is bigger than its ever been and a commitment to building another office and expanding the growth of the company in the US which should result in innovative new products in the years ahead and you can see this company has a lot going for it yet. Is it possible the stock got ahead of itself some yet? Sure, but then again when you look at this company's multiple in comparison to consumer companies instead of a tech stock and you'll find the company is significantly under priced yet.
Looking at the stock itself, I'm anticipating 2018 earnings of $11.50, which is almost 25% above last year's earnings of $9.21 (this includes share repurchases). As such, I certainly don't feel that giving a 17 multiple is out of the question - especially if I see this as a consumer products company more than a tech stock. This places my 2018 price target at $195. I reiterate my ranking of a 1 for the stock and believe that the pullback we're seeing in the stock (due to downgrades and analysts subduing their own hype) and what appears to be an overall market selloff due to rising interest rate concerns, only creates a better opportunity to get into the stock and fill out my position, despite being above my cost basis. I will continue to monitor the stock for a purchase point, but would rather catch the stock starting to rebound than while it falls like a knife as it did on Friday.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
This is the crux of where all of the chaos around this stock is based. Essentially, it seems analysts were expecting some sort of "supercycle" because of the company selling both the iPhone 8 and iPhone X this season. Recently there have been a lot of concerns getting raised about the company not selling as many units as expected and how they've likely reached maximum saturation and things are only going to get worse. Add on top of that forward guidance, which was below expectations in terms of revenue and gross margin, and you have a recipe for downgrades all over the place - which is what has been happening. Prior to the announcement, you had numerous downgrades and price target reductions. Then after the announcement we had more on Friday. All of this is resulting in a correction in the stock's price.
It's important to note that my thesis for investing in this stock had nothing to do with expectations of a "supercycle" in iPhone sales. Everywhere I look, despise it though I may, you don't see people getting rid of their iPhones. Young people want the new ones to take better pictures (I think the animoji marketing ploy for the iPhone X is nothing more than a sad gimmick and haven't seen proof otherwise). Heck, even my parents are looking at getting an iPhone, as much as that grinds on me. So sales are going to continue to happen as people will regularly recycle their phones every 2-3 years on average. You also still see more growth and penetration in China, which is the real story for unit sales.
More importantly are a couple other factors. First is one of the reasons that I picked up the stock, which falls in line with a renown pundit, regarding the fact that Apple has turned more into a consumer goods company in electronics. They sell the phones, sure, but it's becoming the services and the growth we're seeing there that is a major factor. It's the recurring fees and charges from those services that are akin to the razor/razor blade concept that consumer goods companies thrive on for long-term survival. Product loyalty only adds to the ability to those services to grow. Add on top of that a large cash pile that is bigger than its ever been and a commitment to building another office and expanding the growth of the company in the US which should result in innovative new products in the years ahead and you can see this company has a lot going for it yet. Is it possible the stock got ahead of itself some yet? Sure, but then again when you look at this company's multiple in comparison to consumer companies instead of a tech stock and you'll find the company is significantly under priced yet.
Looking at the stock itself, I'm anticipating 2018 earnings of $11.50, which is almost 25% above last year's earnings of $9.21 (this includes share repurchases). As such, I certainly don't feel that giving a 17 multiple is out of the question - especially if I see this as a consumer products company more than a tech stock. This places my 2018 price target at $195. I reiterate my ranking of a 1 for the stock and believe that the pullback we're seeing in the stock (due to downgrades and analysts subduing their own hype) and what appears to be an overall market selloff due to rising interest rate concerns, only creates a better opportunity to get into the stock and fill out my position, despite being above my cost basis. I will continue to monitor the stock for a purchase point, but would rather catch the stock starting to rebound than while it falls like a knife as it did on Friday.
Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities. All views expressed are solely of my own and I am not a professional money manager. Please consult with your financial adviser before taking any action in your own portfolio.
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