The Apple of my eye.
I admit it. I could be unconsciously biased here. Apple (AAPL) has been a friend to my portfolio for a good while now. Not that I have never traded the name. Of course I have.
That said, Apple has been a core position of mine for some time now, and is so pervasive across the universe of funds that most readers with net long portfolios are indirectly impacted by this stock's performance whether or not they hold any shares in their names.
On Thursday evening, Apple released its financial and operational results for the fiscal second quarter. These results were not reflective of outsized growth by any means, but they were better than expected, and they do show a firm growing what matters, its installed base.
For the three months ended April 1, Apple posted GAAP EPS of $1.52 on revenue of $94.836B. The revenue number might have printed in a state of year over year contraction (-2.5%), but also managed to beat Wall Street by more than $2B. Keep in mind that FX impacts shaved 500 basis points (5%) of growth off of this number.
Cost of those sales contracted 3.4% to $52.86B, leaving gross income of $41.976B (-1.4%). This pushed gross margin up to 44.2% from 43.75%. After factoring in operating expenses of $13.658B (+8.6%) on increased R&D expenses, operating income dropped 5.5% to $28.318B. Taking the next step and figuring in interest and taxes, net income decreased 3.4% to $24.16B.
Segment Performance
Products drove revenue of $73.83B (-4.6%). The cost of those sales dropped to $46.795B (-5.1%), resulting in gross income of $27.134B (-3.7%) for a gross margin of 36.8%, up from 36.4%.
- iPhone sales increased 1.5% to $51.334B, beating expectations.
- Wearables, Home & Accessories sales decreased 0.65 to $8.757B, beating expectations.
- Mac sales decreased 31.3% to $7.168B, falling short of expectations.
- iPad sales decreased 12.8% to $6.67B, beating expectations.
Services drove revenue of $20.907B (+5.5%). The cost of those sales increased to $6.065B (+11.7%), resulting in gross income of $14.842B (+3.1%) for a gross margin of 71%, down from 72.6%. Services sales are not broken out the way product sales are. These services include primarily the App Store, Apple Music, Apple Pay, and iCloud.
Geographic Performance
- Americas generated sales of $37.784B (-7.6%).
- Europe generated sales of $23.945B (+2.8%).
- Greater China generated sales of $17.812B (-2.9%).
- Japan generated sales of $7.176B (-7.1%).
- Rest of Asia Pacific generated sales of $8.119B (+15.3%).
Guidance
As regular followers of the stock are well aware, Apple does not provide specifics in their forward looking guidance, or at least they have not since the start of the pandemic. There was nothing offered up in the press conference. However, CFO Luca Maestri did discuss the current quarter in generalities during the earnings call.
Maestri said: "We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points."
The CFO goes on: "For Services, we expect our June quarter year-over-year revenue growth to be similar to the March quarter, while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming." Finally, Maestri said something sort of specific..."We expect gross margin to be between 44% and 44.5%."
Fundamentals
For the first six months of the fiscal year, Apple has generated operating cash flow of $62.565B. Over that time, the firm has paid $6.703B for the acquisition of property, plant and equipment. This left the firm with a massive six month total for free cash flow of $55.862B. Out of that total, the firm has paid $7.418B in dividends to shareholders, while repurchasing $39.069B worth of common stock. The firm also paid off some debt, which I like to see.
Turning to the balance sheet, this left the firm with a cash position of $55.872B, including marketable securities labeled as current and inventories of $7.482B. Current assets ended the quarter at $112.913B. Current liabilities add up to $120.075B, including $10.578B in shorter-term debt and $1.996B in commercial paper. On the surface, this would leave Apple with a current ratio of 0.94 and a quick ratio of 0.88. I would not see either of these as being reflective of a really strong balance sheet. That said, all is not as it appears at first glance.
For one, Apple holds another $110.461B in marketable securities not labeled as current, meaning that these are investments. They could easily be added to cash and thus current assets, bringing those totals up to $166.333 and $223.374B. These are the numbers that analysts talking about Apple's massive stash of cash are looking at. Secondly, $8.131B of Apple's current liabilities are in the form of deferred revenue, which is not a financial liability at all, but one of goods, labor or services owed.
Total assets amount to $332.16B, The firm makes no entry for goodwill or any other kind of intangible asset. Total liabilities less equity comes to $270.002B. This includes another $97.041B in debt. Crazy as it seems, Apple could pay off its entire $109.615B debt-load out of cash and marketable securities more than one and a half times over. This balance sheet is fine.
Wall Street
Since Apple released this report last night, I have come across 15 sell-side analysts that have both opined on AAPL and are rated at a minimum of four stars (out of five) by TipRanks. You would be surprised to see how many well-known analysts who get air time on FinTV who do not even come close to making this cut.
Among those 15 analysts, there are 13 "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings. One of the "buys" did not set a target price so we are working with 14 targets. The average target price across those 14 is $186.57 with a high of $205 (Dan Ives of Wedbush) and a low of $175 (Toni Sacconaghi of Bernstein).
After omitting these two as potential outliers, the average target across the other 12 analysts drops to an even $186.
My Thoughts
Apple looks to have bounced back from the prior quarter quite nicely. Sales of iPhones grew, pushing aside worries driven by performance at other firms known to be suppliers. What's really important, in my opinion, is the growth of the installed base of active products to all time highs at more than 2M. This is what has driven and will continue to drive growth in the higher margin services sector. We mention above the primary Apple services, but we know that Apple services is diving deeper into financial services, an area with a huge addressable market where Apple had until a couple of years ago, almost no presence.
Now, the firm is adding high-yield savings accounts and a buy now, pay later service. This is dependent upon keeping consumers inside of the Apple ecosystem. The installed base is the key to this progress. I am not displeased at all with this report.
Now that I have gotten my personal love for Apple out of the way, a technical note of caution...
Apple opened higher Friday morning. I will not be exiting the name. I will, however, take some profits on this "pop" as I now have nice gains in this stock to protect. I am sure most readers do. What's plain to see, I think, is that AAPL has developed an ascending wedge pattern. These tend to be bearish patterns of reversal.
Not that I know if we are at the point of that reversal. The stock has rebounded off of its 21 day EMA (exponential moving average) multiple times now and has not come anywhere close to its 50 or 200 day SMAs (simple moving average) in months.
I am going to reiterate the $181 target price that I just reiterated about a month ago (April 10). That said, I am not liking what the cup with handle pattern (December through February) is starting to turn into.
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