Apple (NASDAQ:AAPL) did it again. The company blasted away analyst expectations, reporting much-better-than-expected numbers in its first-quarter earnings release. This marks a fantastic turnaround from a year ago, and Apple stock is currently thriving.
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Remember that it was just last January when AAPL’s guidance fell short of estimates, and the company’s critics were saying Apple’s best days were behind it. Instead, Apple stock has nearly doubled over the past year — and it is seemingly set to trade higher again following that marvelous earnings report.
However, will the rally continue? On the one hand, Apple is showing fantastic momentum in iPhone sales and there are other bright spots in their quarterly results, as well.
On the other, Apple stock has already run up dramatically recently — and the coronavirus adds another risk factor to the mix as well.
Blockbuster iPhone Sales
Apple’s earnings report was a success from top to bottom. Starting at the top-line, revenues came in at $91.8 billion for the quarter, which was an 8.9% increase versus the same period last year. It also represented a huge beat over analyst expectations, which had been for just $88.5 billion in revenue. That’s right, Apple topped analyst expectations by a cool $3.3 billion. That, not surprisingly, transitioned into earnings, where Apple posted $4.99 of GAAP earnings against consensus of $4.55 per share.
Overall, it all started with iPhone sales. iPhone revenues surged to nearly $56 billion for the quarter. That was an 8% increase, and came in far ahead of expectations.
However, there was more than just iPhones, though. The whole Apple ecosystem showed solid growth. Apple is now up to 1.5 billion active devices in usage; that’s up 100 million from last year. As long as they can keep that overall number moving up, it creates more user lock-in. That, in turn, offers more opportunity to sell AirPods, services and other such associated products.
This is all very positive and certainly leads to a better outlook for the company’s business, if not necessarily the Apple stock price.
Trade War Passes, but Coronavirus Takes It Place
Unfortunately, Apple stock remains vulnerable to forces outside of its control. Like many other tech companies, it had to deal with the ever-present trade war threat throughout 2019. Impressively, despite the negative headlines, Apple managed double-digit growth for iPhone sales in China last year.
However, that growth last year puts Apple at risk of a downside surprise going forward, as that double-digit growth may turn into an outright decline thanks to coronavirus. On its quarterly conference call, Apple acknowledged that it has closed one of its retail stores in China due to the virus, and that its retail partners have closed many of theirs. In addition, other stores are operating at reduced hours for the time being.
Additionally, Apple has part of its supply chain in the Wuhan area, and will need to adjust things accordingly if local medical officials are not able to control the outbreak quickly. As a result of all the uncertainty, Apple offered a wider-than-usual guidance range for next quarter to account for the uncertainty from the virus.
Where’s Future Growth Going to Come From?
Even discounting near-term concerns like the coronavirus, there’s another central issue for the Apple narrative. Where can they find further growth?
KeyBanc’s analysts put it well following the earnings release, writing:
“While strong customer loyalty should keep sales stable, we see little that could drive a return to secular growth in iPhone, iPad or Mac. At the same time, Services and Wearables appear to be slowing, which seems likely to limit profit growth in the coming years to something comparable to the last five.”
That’s really it in a nutshell. The main hardware lines have reached market saturation. And what growth avenues Apple does have, such as headphones, simply aren’t enough to move the needle for a company that already has a market capitalization of $1.38 trillion and sells $260 billion per year of products and services.
The Apple Stock Verdict
I understand why folks are excited about AAPL’s latest earnings report. The company posted strong numbers, and management deserves all the credit they are getting right now. They’ve done a fantastic job.
However, it’s important to keep in mind that while the company’s results were strong, Apple’s stock price has run up far faster than the underlying fundamentals. Apple reported 13% per year earnings growth over the past five years, and the analyst consensus is around 10% per year compounded over the next five. As KeyBanc said, it’s hard to imagine the next five years being any faster than the past five.
And 10% earnings growth, while solid, is hardly enough to support a stocking going up at a parabolic rate. In fact, it’s just about mathematically impossible for a company as large as Apple to grow its earnings as quickly as its stocks price has been rising lately. Once this momentum burst runs its course, traders will take profit on Apple stock in coming weeks and months.
At the time of this writing, Ian Bezek had no position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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