Earnings Analysis: Apple (AAPL)
On November 1, Apple announced it's fourth quarter results for fiscal year 2018. Revenue rose twenty percent to $62.9B and earnings rose forty-one percent to $2.91. Most important in the transforming Apple story is the continued growth of the services sector, which grew twenty-seven percent YoY. This is important, because it's this services story which I believe will change how the stock is looked at and valued more as a consumer products company than a tech provider. Services provides an ongoing revenue stream even if phone sales are choppy or peaking out. That said, phone sales are still looking good on the revenue front as the company reported a 29% increase YoY and per-unit prices were higher than expected at $793, meaning the higher end phones were wildly sought after. All of these numbers beat analyst expectations, but the headline numbers aren't what has driven the stock's action since the announcement.
Forward guidance was pretty much in line with expectations, anticipating revenues between $89M and $93M. So if the future isn't looking so bleak, what is going on? The biggest noise coming out of Wall Street since the announcement is the fact that going forward, Apple will no longer report on phone sales numbers. The company has deemed the number of phones sold per quarter to no longer be an accurate representation of the progress the company is making. To me, this doesn't seem terribly surprising. We're reaching a law of numbers point here where phone sales numbers are likely to be maximizing and growth in those numbers are likely to be slowing. The per unit price is more telling of how the company is doing as it shows their pricing power - their ability to increase the price of their product without the consumer going elsewhere. It also shows that Apple is looking to their next source of significant growth, in which I believe will be the services offerings that have been growing so well. These services create an ongoing revenue string against the millions of phones they've already sold - consider it a multiplying factor to the already made sales. This isn't how others see things, though. They, instead, feel that the company is trying to hide something and there is dangerous downfall in the future. As such, estimates are being lowered for next year and the price has been dropping. Even with the estimate cuts, though, the company is selling at 15 times next year's lowered earnings estimates while still growing earnings by over 13%. Not taking into account the large amount of cash the company is sitting on (which can be used to buy back shares and increase EPS), this valuation is really low in comparison to so many companies out there. And if you want to compare this to a consumer products company, they are growing at 5% if they're really doing well and getting valuations of 18 times or more for that growth.
In all, the quarter was spectacular. Forward guidance was acceptable and the company continues to be valued on the lower side of things while bearish people whip up any kind of negative story possible to incite fear and get people to let go of the stock. I'm not going to be one of those people as I don't see reason to flee at this time. The stock already appears to be putting in a floor around the $200 mark, though it could go lower yet if we have broad selloffs in the market. I feel the company is under valued because people just refuse to believe any one company can continue to do so well (Hello, Berkshire Hathaway? No one seems to discredit that one's ability). I'm estimating 2019 earnings of $13.75 and I'm giving it a multiple of 18. That leaves my price target at $247.50 and given the fact that leaves room for 25% growth from where we're at, I leave my ranking of the stock at a one.
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.
Forward guidance was pretty much in line with expectations, anticipating revenues between $89M and $93M. So if the future isn't looking so bleak, what is going on? The biggest noise coming out of Wall Street since the announcement is the fact that going forward, Apple will no longer report on phone sales numbers. The company has deemed the number of phones sold per quarter to no longer be an accurate representation of the progress the company is making. To me, this doesn't seem terribly surprising. We're reaching a law of numbers point here where phone sales numbers are likely to be maximizing and growth in those numbers are likely to be slowing. The per unit price is more telling of how the company is doing as it shows their pricing power - their ability to increase the price of their product without the consumer going elsewhere. It also shows that Apple is looking to their next source of significant growth, in which I believe will be the services offerings that have been growing so well. These services create an ongoing revenue string against the millions of phones they've already sold - consider it a multiplying factor to the already made sales. This isn't how others see things, though. They, instead, feel that the company is trying to hide something and there is dangerous downfall in the future. As such, estimates are being lowered for next year and the price has been dropping. Even with the estimate cuts, though, the company is selling at 15 times next year's lowered earnings estimates while still growing earnings by over 13%. Not taking into account the large amount of cash the company is sitting on (which can be used to buy back shares and increase EPS), this valuation is really low in comparison to so many companies out there. And if you want to compare this to a consumer products company, they are growing at 5% if they're really doing well and getting valuations of 18 times or more for that growth.
In all, the quarter was spectacular. Forward guidance was acceptable and the company continues to be valued on the lower side of things while bearish people whip up any kind of negative story possible to incite fear and get people to let go of the stock. I'm not going to be one of those people as I don't see reason to flee at this time. The stock already appears to be putting in a floor around the $200 mark, though it could go lower yet if we have broad selloffs in the market. I feel the company is under valued because people just refuse to believe any one company can continue to do so well (Hello, Berkshire Hathaway? No one seems to discredit that one's ability). I'm estimating 2019 earnings of $13.75 and I'm giving it a multiple of 18. That leaves my price target at $247.50 and given the fact that leaves room for 25% growth from where we're at, I leave my ranking of the stock at a one.
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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