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Apple (AAPL) Stock: Now That’s a Go Ahead!

support@smarteranalyst.com (Ben Mahaney)

Apple (AAPL) reported a surprisingly solid quarter with the company delivering above expectations on both revenue and dil. EPS. Specifically, the tech giant reported revenue of $58.015 billion and dil. EPS of $2.46, beating to consensus estimates of $57.37 billion and dil. EPS of $2.36. Investors reacted positively to the earnings beat, bidding up the stock nearly 7% in Wednesday's trading session.

Apple also provided guidance for the quarter ending June 30 2019 for "revenue between $52.5 billion and $54.5 billion Gross margin between 37 percent and 38 percent. Operating expenses between $8.7 billion and $8.8 billion. Other income/(expense) of $250 million and tax rate of approximately 16.5 percent.”

Revenue outlook of $52.5 billion-$54.5 billion beat consensus estimates of $51.93 billion at both the low-end and high-end of the range. Apple also announced an additional “$75 billion for share repurchases and Apple’s board of directors has declared a cash dividend of $0.77 per share of the Company’s common stock, an increase of 5 percent.”

It was a toss-up quarter, but with results that beat expectations overall despite weakness in smartphone and computer sales. iPhone revenue declined y/y -17.3% from $37.559 billion (Q2’18) to $31.051 billion (Q2’19), iMac sales declined by -4.5% from $5.775 billion to $5.513 billion. The weakness tied to smartphones and desktop/notebook computers conforms with the weak results reported by peers. Both smartphone and computer shipments are expected to decline this year according to global unit forecasts.

Apple’s quarter was viewed as a success, because it was less dependent on smartphone sales to sustain topline results. iPad revenue grew from $4 billion to $4.872 billion representing +21.8% y/y growth, wearables, home and accessories also grew from $3.944 billion to $5.129 billion representing +30% y/y growth, and Services also grew from $9.85 billion to $11.45 billion adding +16% y/y growth.

Despite the significant drop-off in iPhone revenues -17.3% y/y, Apple itself reported a more modest -5.1% y/y decline in revenue. Apple’s other business segments offset some of the weakness in smartphone results, which positions Apple favorably when smartphone results start to improve.

Luca Maestri (CFO) also mentioned on the earnings call, that the financial terms of the agreement with Qualcomm will not be discussed. But, financial outlook for gross margin of 37% to 38% does reflect the impact from the Qualcomm agreement. Tim Cook (CEO) also mentioned that a number of new services will contribute to service revenue growth, such as Apple News+, Apple TV+, Apple Arcade, and Apple Card. On-going service revenue ramp will offset some of the weakness in smartphone/PC revenue.

Daniel Ives from Wedbush Securities mentioned in a note on Tuesday following Apple’s earnings announcement:

In a nutshell, the company beating the Street and most importantly guiding stronger for June will put "major fuel in the engine" for the bulls tomorrow morning and ultimately put shares on a path to make new highs in our opinion over the next 3 to 6 months. The skeptics continue to scratch their heads at the meteoric move in Apple's stock since early January lows and this report/guidance is just another major step in the right direction for Cook and Cupertino as they navigate near-term turbulence in China which appears to be slowly abating. We maintain our OUTPERFORM rating and $225 price target.

Overall, Apple’s Q2’19 results, and financial guidance painted a much better forecast than what investors were anticipating. Assuming, the smartphone-cycle shows patterns of recovery, the return to revenue growth will keep bulls optimistic. WWDC 2019 in June and the pre-launch iPhone events could add upside to shares. Investors have reset expectations tied to a smartphone turnaround until next-year with near-term financial results strong enough to keep investors onboard.

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