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Is Apple now suddenly a safe investment again?

Brian Sozzi
Editor-at-Large

A hat tip to Apple CEO Tim Cook, aka hype master in chief. You really brought your A-game on the earnings call Tuesday night.

The 58-year-old workout enthusiast and his right hand Luca Maestri (Apple’s chief financial officer) did a masterful job doing everything in their verbal power to rally an Apple investor base still hurting from a shocking $5 billion-plus quarterly revenue warning on Jan. 2. To this former stock analyst, it was really a sight to behold while marking time on the old (but very reliable) Apple Watch 1.

The phrase “all-time” was used six times on the earnings call when describing the performance of various product lines and geographies. “Record” was sprinkled in there a cool 20 times, as analysts would say, to add “flavor” to the description of the quarter.

Nothing gets a stock analyst feeling hotter than hearing “records” and “all-time highs” on an earnings call.

With stats offered up like those below, it’s no small wonder Apple shares popped 5% on Wednesday despite a mere 1 cent first quarter earnings beat and lackluster second quarter guidance.

  • Wearables sales up 50%.

  • Cook points out Apple’s business outside of the iPhone grew 19% in the quarter. Thank you Airpods, Apple Watch and iPad.

  • Total active installed base of Apple devices at 1.4 billion, up from 1.3 billion in Jan. 2018.

  • Services revenue up 19%.

  • Cloud sales up 40%.

  • Apple News hit 85 million monthly active users.

  • iPad revenue growth the highest in almost six years.

  • Services gross margin of 62.8%, a new Apple disclosure. Generally in line with Wall Street estimates.

  • Service gross margin up 170 basis points sequentially.

  • Services sales on track to double by fiscal 2020, per Apple’s original guidance offered in fiscal 2016.

  • $245 billion in cash and marketable securities at quarter end.

Again, a full arsenal of amazingness shared by the Apple management team in order to get the worst-performing S&P 500 tech stock this year jump started. Dare I say Maestri strongly hinted at a generous boost to Apple’s dividend and share repurchase plan in March (when Apple discloses its capital return plans) on the call? Warren Buffett’s (Apple’s largest individual shareholder) must be salivating at the prospect.


All in all, the carefully crafted earnings call appears to have been enough to keep most of the 49 analysts that cover Apple on Wall Street content.

“Many investors feared a more significant guide down was coming for March quarter revenue and with the ‘bad news,’ which turned out not as bad as expected, out of the way, some that had been sidelined will likely re-visit the stock,” said Piper Jaffray analyst Michael Olsen.

Or how about this gem.

“Guidance wasn’t as bad as we had feared and management sounded upbeat and confident. They also highlighted that there will be “exciting announcements later this year” which we take to confirm a video subscription is coming soon-ish,” penned Ben Schachter, Macquarie analyst.

Right.

Lost in all of this is that mighty Apple said: (1) Sales in China fell 4.8% from the prior year with declines across iPhone, iPad and Mac; (2) iPhone sales down 15%; (3) Services sales decelerated to 19% from 24.5% growth in the prior quarter; and (4) Product gross margin rose 60 basis points sequentially, suggest hearty declines in the iPhone.

Apple exits the first quarter having not figured out how to attack the market weakness in China. Perhaps they have internally, but as of right now it’s likely sales in the market will continue to be under pressure owing to sky-high iPhone prices and slowing economic growth.

Here in the states consumers are holding onto their iPhones longer because, well, it’s a quality product. Prices relative to the product’s perceived utility are also too high, another thing Apple has to figure out.

Seeing as the iPhone is Apple’s most important product, it’s hard to get excited about the stock until sales growth and margin expansion picks back up — globally — for whatever reason. The latter will be tough near-term as Apple tries to clear its distribution channels of unsold iPhones, probably with price cuts.

“Services gross margin of 63% was strong, in-line with our expectation for ~64%. But for now this is not enough to offset the eroding margins in the hardware business and we are now reducing near-term estimates for the third time in two months,” said Jefferies analyst Tim O’Shea. “Hardware is beset by a number of issues including China macro, lengthening smartphone upgrade cycles, and FX... issues unlikely to be fixed in the near term.”

O’Shea’s assessment is spot on — Apple is now a show me stock. Show investors a path out of the iPhone sales malaise, Cook. Show investors that $245 billion in cash, for once, will be used to acquire a large business that could provide another lucrative long-term revenue stream, Maestri.

But hey, that was a hell of an earnings call.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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