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Behold! The Transition Beckons for Apple Inc. (NASDAQ:AAPL)

Apple Inc. (NASDAQ:AAPL) is reeling today after reporting a miss on iPhone sales and sandbagging next quarter guiiPhone The stock traded down into a $205 handle during Friday’s market action and didn’t really recover much into the Trump-tweet-inspired closing pop in the indices.

By the numbers, the Company posted quarterly revenue of $62.9 billion, an increase of 20 percent from the year-ago quarter, and quarterly earnings per diluted share of $2.91, up 41 percent. International sales accounted for 61 percent of the quarter’s revenue. Services revenue reached an all-time high of $10 billion. Excluding a one-time favorable adjustment of $640 million recognized in the fourth quarter of fiscal 2017, Services revenue grew from $7.9 billion in the fourth quarter of fiscal 2017 to $10 billion in the fourth quarter of fiscal 2018, an increase of 27 percent.

Apple Inc. (NASDAQ:AAPL) shares, however, are likely down in part because the company also announced that it will no longer disclose product shipment data each quarter. Investors rarely like reduced disclosure.

In addition, the easiest motive to imagine is that the company doesn’t have to do it and wouldn’t want to do it if it thought that data was going to start to stand out as a sign of cyclical and even secular weakness – at least, that would certainly be how this is framed by AAPL bears.

Management also said it will disclose gross profit from its services offerings, which will highlight the profitability of that growing business. At the end of the day, it’s not a huge surprise that Apple is changing its disclosures in order to craft the investment narrative.

With everyone already owning a smartphone, and people starting to realize that last year’s version is still an amazing piece of technology, the product cycle is lengthening at the top of the tree and the fruit has already been picked on the low-hanging branches. The company tried to keep sales stable by making them “Blingy” and jacking up the price, but that can only be taken so far.

At the end of the day, the company is in the process of transitioning to a new growth horse. And we would assume that will be gradually more focused on maximizing cloud services than device sales. The margins are much better, and so are the valuations for the bigger players in that space.

Apple’s forecast for the first fiscal quarter came in towards the low-end of expectations (up 0.8-5.3% to $89-93 billion). Still, Apple tends to come in at the high end of its sales forecast, so analyst estimates were probably more accurate than ‘too bullish’.

IBM has already manifested the cautionary tale in a sort of historical saga.


Analyst Reactions

According to our notes, here is how the sell side has responded thus far:

BAML downgraded to Neutral from Buy; tgt $220

Needham notes AAPL reported FY4Q18 revenue of $62.9B (up 20% y/y, and 4% above our estimate) and EPS of $2.91 (up 41% y/y and 7% above their estimate). The biggest news from AAPL’s FY3Q18 call is that it will no longer “provide unit sales data for iPhone, iPad and Mac” beginning in the Dec quarter. They support this change because they believe that investors are valuing AAPL as an ecosystem company and they would prefer more metrics about AAPL’s installed base of unique users, churn rates, and trends in average revenue per user. AAPL’s discussion of units each quarter tethered investors to its hardware roots. However, long-time hardware analysts assume that this change implies falling unit sales, and AAPL’s below consensus guidance for the December quarter may drive downside: They are buyers on weakness.

Cascend Research notes Apple reported another strong Q driven by higher iPhone ASPs, and growth pretty much everywhere due to their Ecosystem impact, but… Guidance is below what the Street was looking for in 4Q18 Our measure of the iPhone supply chain suggests it has ramped up solidly (but reasonably) and is still growing on a Y/Y basis, suggesting it is healthy (unlike last year Even with lower consensus estimates, they believe Apple trading down on this report is an opportunity for investors: They see AAPL transforming from an iPhone manufacturing co into an Ecosystem co — they’ve been pushing this theme for a year and it is finally materializing

RBC tgt to $240 from $250

Citigroup tgt to $240 from $265

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