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Will Apple Keep up its Revenue Performance?

It's time for us to take another bite at the Apple. Back in January, Apple, Inc. (AAPLResearch Report) CEO Tim Cook dialed back the guidance on the company’s Q1 earnings in a clever pre-emptive damage control move that simultaneously acknowledged declining sales revenue, lowered the earnings bar, and set the stage to meet or exceed that bar. In a classic example of Apple’s long game, Cook accepted a hit to the stock value early, in order to ameliorate the damage later. When Apple’s Q1 report turned out OK in light of the carefully managed expectations, the stage was set for last week’s Q2 beat.

It’s fair to say that Tim Cook’s gambit has paid off. In April 30’s Q2 report, Apple met or exceeded expectations that were set at the end of Q1. The Q2 report justified management’s announcement earlier this year of a shift in focus toward services and user base monetization strategies. We’ll look at the news, and then dive into TipRanks’ analyst database to see what Wall Street has to say.

Crunching Some Numbers

First the headline numbers. Apple reported earnings of $2.46 per share, beating the forecast by 4%. Revenues came in 1% over the expectation, at $58 billion. Total revenues were down 5% from the year-ago quarter, but Cook primed us for that earlier this year. Investors shrugged it off, apparently, as AAPL shares jumped 5% after the Q2 earnings release.

We can break down Apple’s revenues by segment, for a better look at where the company is heading. iPhone revenues, at $31.05 billion, were down 17% from last year’s Q2, and the Mac revenue of $5.51 billion also showed a decline. That was the bad news. Other segments were up, however, with gains that equaled or beat iPhone’s decline.

The Services segment, on which Apple is staking its future, is up 16% to $11.45 billion quarterly revenues, iPad sales were up 19% to the segment’s best performance in 6 years, and the Wearables segment (which includes other accessories) showed a whopping 50% jump to $5.13 billion. While these gains did not fully offset the loss in iPhone revenue – the smartphones are, by sheer numbers, still Apple’s premier product and count for over 53% of total revenues – the pattern of gains and losses clearly shows how Apple is right to shift focus from the maturing iPhone market to the expanding Services, iPad, and Wearables.

Time to Monetize the Base

Tim Cook stated that path clearly in his statements on the earnings: “Our March quarter results show the continued strength of our installed base of over 1.4 billion active devices, as we set an all-time record for Services, and the strong momentum of our Wearables, Home and Accessories category… We delivered our strongest iPad growth in six years, and we are as excited as ever about our pipeline of innovative hardware, software, and services.”

This is all consistent with the ‘Show Time’ event that Cook hosted six weeks ago. The event – in effect, the flip side to early January’s guidance revision – introduced us to Apple’s overarching strategy to cope with both the maturing smartphone market and the possibility of economic slowdown in China, and the reduced iPhone sales that both portend. In short, it’s time for Apple to monetize the user base.

Keep your eyes open this summer and fall; Apple will be releasing its Apple News+, Apple Card, AppleTV+, and Apple Arcade services. New models for the core products in the Mac and iPad lines have also been announced, and the company is developing to wireless earphone in the Wearables department. iPhone development will continue, but expect new products to release at a slower pace better suited to a 3- to 5-year replacement cycle.

Top Analysts Agree

Market analysts agree that Apple shares are a buying prospect. Writing from Argus Research, five-star analyst Jim Kelleher (Track Record & Ratings) raised his price target by 11%, from $225 to $250. The new price target suggests an 18% upside potential to AAPL shares.

Kelleher specifically pointed out “Apple’s high Services revenue in the quarter and the surge in its contribution from Wearables & Home segment.” He also noted the boost in confidence provided by “management's capital return program after Apple's expanded buyback and increased dividend announcements.”

The capital return program cited by Kelleher was summed up by company CFO Luca Maestri: “Given our confidence in Apple’s future and the value we see in our stock, our Board has authorized an additional $75 billion for share repurchases. And because we know many of our investors value income, we’re also raising our quarterly dividend for the seventh time in less than seven years to $0.77, an increase of about 5% from the previous amount.” Since initiating dividend payments in 2012, Apple has made a consistent policy of rewarding shareholders.

Citigroup analyst Jim Suva (Track Record & Ratings) also gave a bullish review of AAPL stock, saying, “Simply put Apple’s results and outlook across most metrics were clearly better than expected. As a result, both our and consensus estimates will move slightly higher…” Suva’s stance is less aggressive than Kelleher’s, and his price target of $220 indicates a more modest 4% upside.

Since May 1, Apple has received 13 buy ratings from Wall Street’s best rated analysts as opposed to 10 holds, giving the stock a ‘Moderate Buy’ consensus rating. AAPL shares sell for $211 and have an average price target of $218; this gives the stock a modest, but real, upside of 3.26%.  This upside is in line with the stock’s recent history – it is important to bear in mind that as AAPL’s share price has risen quickly in recent months, it has developed a pattern of outpacing the analysts’ price targets.

A Solid Smart Score

The buy ratings and price targets indicate a modestly bullish future for Apple, but they are not the only positive indicators. The TipRanks Smart Score brings together all of the data into one package, focusing on eight factors that are known to indicate future success. Apple gives us a particularly good example of the Smart Score in use, as it shows that a company need not have perfect ratings to achieve a high score. AAPL shares hold a Smart Score of 8, indicating the stock is likely to outperform the market. Let’s break it down.

On the debit side, we find that both insiders and investors have been selling Apple. A closer look shows that insider holdings are only down $255K in the last three months, while AAPL’s decline in investment portfolios is only 1%; while in the red, these numbers may also be indicative of profit taking as the stock has risen in recent weeks. Hedge fund activity presents a stronger negative on this stock.

Turning to the credit side, we find plenty to outweigh the debits and give Apple its ‘Outperform’ rating.  We have already discussed the analyst consensus; the blogger and news sentiment are similarly bullish. Apple has been receiving great press, with 84% of the top financial bloggers and 82% of the news coverage giving a positive outlook. The final categories are the technicals and fundamentals, two different modes of traditional stock analysis. On the technical side, the moving averages are trending up, giving a positive rating, while the one-year momentum shows AAPL shares up 20%. For the fundamentals, Apple’s 49% return on equity is clearly the key factor.

Looking Ahead

Apple takes an optimistic view of its near future, seeing revenues of $52.5 to $54.5 billion, with predicted gross margins of 37 to 38%. The company faces a serious challenge – lower sales in its flagship iPhone line – but has articulated a clear plan to meet it and initial results look promising. On a fundamental level, Apple still has those 1.4 billion active devices sold, translating to a loyal user base more than 1 billion strong.

The TipRanks data shows that Apple management is right to be optimistic. A variety of indicators – from the human to the technical – point toward this stock outperforming the market.

Enjoy the Research Report on the Stock in this Article:

Apple, Inc. (AAPL) Research Report

Disclosure: This author is long on AAPL.