Shares of Apple Inc. were up nearly 7% on Wednesday despite the company posting cumulative lower sales across its line of businesses in its fiscal third quarter. The numbers and forward guidance were not as bad as expected, however, and optimistic investors pushed the stock’s price firmly over $100 for the first time in three months.
Here is a summary of its numbers as provided in its earnings presentation:
Indeed, the guidance seems to indicate that sales momentum may be gaining. The company sees revenue in a $45.5-$47.5 billion range for next quarter, which implies somewhere between a 7-12% YOY decrease. While that doesn’t sound great, it is improvement over the latest quarter when sales dropped by 15% (noted above).
China continues to be a concern for the company, as sales there plummeted by better than 30% YOY. iPhone uptake/upgrades were also in the tank, with revenue down by almost a quarter, though unit movement was only down 15 percent. iPhone comprises about 56% of Apple Inc. ’s sales.
Of bright note were iPad and services revenue, up 7% and 19%, respectively, during the latest quarter. Unfortunately services now only accounts for a little over 15% of Apple’s business.
The “Other Products” category, which includes Apple TV, Watch, Beats, and iPod, amongst other items, was down in-line with other businesses, about 16 percent.
Looking Ahead at Apple
Given erratic top- and bottom-line performance over the past half decade, investors clearly are not willing to provide a premium multiple to Apple’s shares. Indeed, at a $104 trade, the company trades at a discount to the overall market at about a 12.5 earnings multiple.
As I’ve noted in the past, investors should likely view Apple not for its solid growth characteristics, but for the critical mass it has achieved in terms of its customer base. While sales and earnings may be somewhat in flux for the foreseeable future, investors are still looking at a company with a tremendous cash hoard and the ability to raise its dividend both in good and less prosperous times.
Famed value investor Warren Buffett apparently saw value in Apple earlier this year, as Berkshire Hathaway took a position in the company. On the flip side, noted corporate raider Carl Icahn extinguished his position right about the same time, seeing limited growth potential.
The launch of a new iPhone line, which many see in an early September window, is the next chance the company has to lure customers into its ecosystem. Many seem to think the next-gen iPhone will have less robust improvements compared to previous version upgrades. That certainly brings to question what the revenue picture will be heading into 2017 as buyers decide whether to trade up or not. For now, investors seem to be viewing the glass half-full, with the stock 15% above its 52-week lows.
Looking Way Ahead at Apple
With a $566 billion market cap and roughly $200 billion revenue run rate, steering the company may be more akin to navigating an aircraft carrier as opposed to a speed boat. Apple, in my mind, remains somewhat of a “2 trick pony” with iPhone and iPad representing the vast majority of sales. The iWatch has helped, but clearly isn’t going to be a meaningful growth elixir. This dependence is not healthy in my opinion, despite the number of phones the company still moves on a quarterly basis.
Clearly opportunity abounds elsewhere with omnipresent speculation that Apple will make major moves in television, automotive, and other product categories. Its cash hoard affords the ability to make meaningful, disruptive acquisitions or up R&D of newer consumer products that interact well in its ecosystem.
Still, investors need to realize that competition in its core categories is not going away. Cheaper smartphones that appeal to a value conscious consumer will continue to have their place and potentially eat away at share, especially in tough economic times. While Apple’s ecosystem may seem impenetrable today, it’s a bit difficult to predict the future of technology and economic pathways. Ten years ago, I doubt most people would have thought that Nokia would turn into a fringe cell phone player. Or that our banking system would be brought to its knees because of toxic residential mortgage derivative securities.
For now, like many, I continue to see Apple as a solid fairly durable position in my portfolio. However, I have it on a somewhat shorter leash than other stocks, sheerly because of its exposure to the rapidly evolving and potentially changing habits of technology consumers.
Adam Aloisi was long shares of AAPL at time of writing, but positions can change at any time.