The Tematica take on Apple’s September quarter results
Key points inside this issue:
- Our price target on Apple (AAPL) shares remains $250.
Our shares of Apple (AAPL), which sit on Tematica’s Select List as part of our Digital Lifestyle investing theme, traded off today following last night’s September quarter earnings report and Wall Street’s reception. While Apple surprised on the upside for both September quarter revenue and EPS, the company not only issued its characteristically conservative guidance but also revealed that as of this quarter it will no longer no longer be providing unit sales data for iPhone, iPad, and Mac. In the September quarter, the all-important iPhone business saw units flat year over year, but revenue climb 29% due entirely to the improved average selling price associated with newer models.
Despite double-digit growth at Apple’s Services business to roughly $10 billion (16% of sales) and more than 30% year over year growth at its Other Products (7% of sales), that reporting decision raised questions and reignited bearish concerns over the health of the smartphone market, particularly for newer, higher priced models as well as the iPad, which saw its units fall 6% year over year. Going forward Apple will also report gross profit and margins for its products and services business as well as rename its Other category to Wearables, Home and Accessories.
What we suspect is Apple is attempting to do is get investors to focus on the combined business model of its devise and services, which to us reflects increasingly how consumers are using them. Much like the razor and razor blade business, people buy the iPhone, iPad or Mac and chew through content delivered through Apple’s digital content offerings that range from iTunes to Apple Music as well as recently acquired Texture. We see this move in line with the expected launch of Appel’s proprietary streaming video content that in our view will only help makes those devices even stickier with users.
Clearly, the combination of soft guidance paired with this reporting change is what is spooking the shares as it paints the picture that Apple has something to hide. That led several Wall Street firms, including Bank of America Merrill Lynch to downgrade Apple shares to Neutral from Buy and cut its price target to $220.
Understandable, but in my view, it misses the notion that Apple is increasingly becoming a device and services company. This fits with Apple opting to break out the gross profit and gross margin performance of the two businesses going forward. From my perspective, Apple has just completed updating its product line, including the more affordable iPhone XR, which bodes well for the replacement demand among the faithful Apple install base. On net, higher ASPs will drive revenue and profits while Apple continues to flex its balance sheet, repurchasing shares and paying dividends.
The bottom line is I continue to see Apple as a key player in the increasingly digital lifestyle, and while we wait for the upcoming 5G upgrade cycle. Given our $165-ish cost basis, odds are we won’t have a chance to scale into the position at better prices; hopefully, that will be the case but if we do, I’ll be opportunistic.
- Our price target on Apple (AAPL) shares remains $250.
