- Many analysts had a "better than feared" response to Apple's earnings, largely breathing a sigh of relief despite a revenue decline, lower profit and downbeat outlook.
- "We were surprised by" the stock's pop after earnings, Bernstein's Toni Sacconaghi writes.
- "The bad news is over for a while," says UBS analyst Tim Arcuri.
Many analysts had a "better than feared" response to Apple's earnings, largely breathing a sigh of relief despite a revenue decline, lower profit and downbeat outlook.
Analysts also mostly shrugged off that Apple for the first time was no longer including unit sales for iPhone, iPad, and Mac. Apple did, however, reveal the profitability of its services business.
It had issued a downtrodden pre-announcement on Jan. 2 with a revenue warning and mostly blaming China.
The company's stock is up almost 4 percent after the open, a day after the earnings report.
Bank of America's Wamsi Mohan said: "The stock could see a relief rally given the negative revisions seen into the print, although investors will likely look for color on services rev and margin trajectory."
Bernstein's Toni Sacconaghi said in his post earnings note that, "we were surprised by Apple in the aftermarket last night, up 5%+; with EPS estimates likely to fall ~5%, that would suggest the stock is 10%+ more expensive today than yesterday, and above Apple's five-year average on relative P/FE and EV/FCF."
Turning to the service business numbers, Citi's Jim Suva wondered whether, "Is Apple a services company? No. Apple is an IT Hardware product company with great services which are attached to Apple products. Without Apple products its services struggle to exist ... if Apple services were to grow over 50% the next few years it would still represent less than 25% of the company's total sales "
J.P. Morgan's Samik Chatterjee said in his earnings wrap that, "Although yesterday's announcement will do little in terms of addressing some of the medium-term concerns investors have relative to the drivers of revenue growth as the smartphone cycle matures, we believe book-ending the downside on volumes will help in driving investor focus back to the Services opportunity."
However, Morgan Stanley's Katy Huberty's post earnings take was titled, "Reasons to be bullish." She noted that, "Importantly, Apple made investors feel better about several recent debates - 1) weaker iPhone demand, 2) gross margin risk, and 3) Services growth deceleration, which we address below in more detail..."
UBS analyst Tim Arcuri increased his price target to $185 from $180, and said, "we think the worse of the bad news is over for a while..."
"Estimates move lower, but less than feared... We lower March quarter revenue by 7%, or $4B, and FY19e revenue by 1.4% with FY19e EPS moving from $12.39 to $11.50... That said, buy-side expectations deteriorated meaningfully in the four weeks post Apple's pre-announcement such that even our lowered estimates are better than feared (bears expect FY19e EPS of $11)... Importantly, Apple made investors feel better about several recent debates - 1) weaker iPhone demand, 2) gross margin risk, and 3) Services growth deceleration, which we address below in more detail... We continue to value Apple on a SoTP basis which drives our $197 PT, down from $211 previously on our lower revenue estimates offset partially by higher peer multiples..."
"This quarter was clearly about investors putting bookends around downside risks to Apple's iPhone unit volume outlook and the F2Q19 revenue guidance of $55-$59 bn managed to reassure investors that volume risks are largely priced in the shares at current valuation... As we had previewed in our Jan 28 report, buy-side expectations going into the announcement were low and below sell-side revenue consensus of $59 bn, which in part should drive a positive reaction to the F2Q19 revenue guide today... Beyond the F2Q19 guidance, which we believe implies 20%+ y/y decline in iPhone shipments, investors will look for improvement in y/y volume trends (although still declining) in the remainder of the year, leading to low double-digit percentage volume declines for the year... Outside of the focus on iPhone volumes, there were other silver linings in the report relative to new disclosures on the Services segment, including gross margin of 62.8% in F1Q19, which we believe was at the high-end of investor estimates going into the announcement... Additionally, Services gross margin improvement of +450 bps y/y and +170 bps q/q in F1Q19 is likely to increase investor confidence in long-term expansion of gross-margins with increasing scale of various services opportunities. We believe the better than expected Services margin is likely to drive upside to investor expectations for intrinsic value of AAPL shares, led by: 1) higher portion of the company's profits coming from Services, which investors assign a higher multiple to relative to the hardware-centric businesses; and 2) increase investor confidence in assigning a premium valuation to the Services opportunity relative to hardware businesses... Although yesterday's announcement will do little in terms of addressing some of the medium-term concerns investors have relative to the drivers of revenue growth as the smartphone cycle matures, we believe book-ending the downside on volumes will help in driving investor focus back to the Services opportunity... We maintain our Overweight rating on a combination of medium-term earnings growth, multiple re-rating to more appropriately reflect the Services opportunity, and balance sheet optionality..."
"With the change by Apple to focus on services in its reporting segments and no longer providing unit data we answer, Is Apple a services company? No... Apple is an IT Hardware product company with great services which are attached to Apple products... Without Apple products its services struggle to exist... Users have an unlimited amount of white box and less expense OEM products to choose from as well as competing open and closed operating systems... The full product + software + service package is what makes Apple unique as others do not control this... Yes the focus by Apple on services may help its valuation over time, but we note even if Apple services were to grow over 50% the next few years it would still represent less than 25% of the company's total sales... So the near-term debate is the investor set up and expectations... The current investor sentiment is clearly in the camp of the fear of the past but we look at the opportunity of the future as detailed below.. We recognize there are no immediate positive catalysts for the stock which is fine for a stock trading at a valuation of 13x PE or 11x PE excluding cash and we reiterate our Buy rating with a target price $170..."
"Unsurprisingly given the pre-announcement, Apple's fiscal Q1 was largely in-line... iPhone revenues declined 15% YoY, with units declining an estimated 16%+... Apple reported Services gross margins for the first time (at 63%), consistent with expectations... More importantly, Apple guided Q2 below consensus – portending downward revisions to sell-side FY19 EPS estimates in the range of ~5%... That said, Q2 guidance now appears achievable, unless iPhone channel inventory build was significantly worse than history (e.g. ~6 million units)... Our new Q2 revenue estimates are accordingly at the midpoint of guidance... Apple's installed base growth appeared to decelerate meaningfully over the last year and in the quarter – resulting in 8% growth in 2018, vs. a 14% CAGR between 2015 and 2017... All else equal, this will be a headwind to Services growth going forward, highlighting the imperative for Apple to launch new Services... We also estimate that used/resold phones may comprise 30 – 40% of iPhone's current installed base of 900M units, and are likely to drive lower services attach... More broadly speaking, last night's earnings call reaffirmed our concern that several structural headwinds exist to iPhone's business, including (1) elongating replacement cycles; (2) natural limits to pricing; and (3) a strategically challenged position within the China market... We view Apple's responses to date as more tactical than strategic, underscoring the challenges."
"Early phases of transitioning from distributor to content aggregator/provider Apple stock should react favorably as revenue guide was better than feared, though there was ample information here for both bulls and bears (gross margin guide, elongating iPhone upgrade rates, big Y/Y declines in hardware margins despite big iPhone ASP increases)... We remain optimistic because 1) we are now through the worst of the bad news for a while; 2) that AAPL is getting a paltry ~$30MM/Q from its largest 3rd party subscription app shows the vast fertile ground; 3) iPhone replacement cycles continue to elongate but AAPL's numbers suggest they could now be close to some asymptote; and 4) new proprietary content (video) and aggregation services (gaming) this year should spur a pivot in the narrative... Video in particular does not seem like a zero-sum-game with room for AAPL to co-exist and while there are existing players in these content markets, AAPL can marry new content with distribution... Net, we increase our PT from $180 to $185 as we think the worse of the bad news is over for a while..."
"Apple reported F1Q19 product gross margin of 34.3% and services gross margin of 63%. Services GM expanded significantly from F1Q18 to F1Q19 (58% to 63%). By our estimate, guidance implies iPhone shipments of ~41mn for the Mar quarter at the midpoint of the rev guide (subject to channel inventory comments if any). GM for F1Q19 came in at 38% which was in-line with Apple's pre-announcement, and compares to prior guidance range (38.0%-38.5%). Apple guided F2Q rev $55bn-59bn vs. our/Street prior est. of $57.5bn/$58.98bn. F2Q GM was guided to 37%-38% (37.5% at mid-pt) vs. our/Street prior est. of 38.6%/38.2%. Apple returned over $13bn to shareholders in F1Q19. The stock could see a relief rally given the negative revisions seen into the print, although investors will likely look for color on services rev and margin trajectory."
"Apple's FQ2 revenue guidance missed our below-consensus estimate by 2% and the company's FX adjusted guidance implies continued deterioration in iPhone revenue in FQ2. We believe iPhone inventory levels exiting FQ1 are within the company's normal range and the implied deterioration in iPhone revenue is likely a reﬂection of uncertainty in demand. Apple's newly disclosed Services gross margin at ~63% fell short of our expectations due to higher than expected cost allocations associated with recent revenue restatements. Overall, we did not pick up any signs of either weakness or improvement in the underlying business trends for Apple. We are concerned that prolonged economic weakness in key markets like China could continue to hurt the company's performance this year. Remain Neutral."
"Shares of Apple are rallying post close on what we view as better-than-feared F2Q19 (March) guide – revenue at $55B-$59B (including -$1.3B from FX) / GM%: 37%-38% / opex: $8.5B-$8.6B vs. our prior $58.6B / 38.0% / $8.3B estimates (street: $59.0B / 38.2% / ~$8.1B). Apple expects continued iPhone weakness in F2Q19, driven by ongoing impacts from FX (-$1.3B y/y rev. impact), slowing upgrades / lack of carrier subsidies, and battery replacement program; however, Apple did note it exited F1Q19 with iPhone channel inventory at a "comfortable" level. Apple reiterated confidence in achieving its F2020 services target with revenue up 2x vs. F2016 (+19% CAGR); emphasizing some incremental key metrics as summarized below. While we consider Apple's incremental installed base and services disclosures / expansion to be a positive, we maintain a Market Perform rating as we think Apple's challenges in China will persist."
This is a developing story. Check back for updates.