Readers who read Market Recon this morning already know that I added to my long position in Apple (AAPL) last night during the initial selloff just after the firm's fiscal fourth quarter earnings were released and ahead of the conference call.
On Thursday evening, for the three month period ended September 24th, Apple posted GAAP EPS of $1.29 on revenue of $90.146B. These top and bottom line numbers both exceeded consensus view, and were good enough for earnings growth of 4% on revenue growth of 8.1%.
Gross margin came to 42.3%, which was expected. Operating expenses increased 15.9% to $13.201B as operating income landed at $24.894B (+4.7%). This number beat Wall Street. According to the firm, the active installed base of devices reached an all-time high for all major product categories. Again.
Segment Performance
Products generated revenue of $70.958B (+9%) at a gross margin of 34.6%, up from 34.3%.
- iPhone generated $42.626B in sales, +9.7% from the year ago comp, but short of expectations.
- Mac generated $11.508B in sales, +25.3% from the year ago comp, decisively beating expectations.
- Wearables, Home and Accessories generated $9.65B in sales, +9.9% from the year ago comp, beating expectations.
- iPad generated $7.174B in sales, -13.1% from the year ago comp, falling short of expectations.
Services generated revenue of $19.188B (+5%) at a gross margin of 70.5%, unchanged from the year ago comp.
Geographically:
- Americas grew sales 8.1% to $39.808B
- Europe grew sales 9.6% to $22.795B
- Greater China grew sales 6.2% to $15.47B
- Japan experienced a 4.9% sales contraction to $5.7B
- Rest of Asia Pacific grew sales 2.3% to $6.373B.
Guidance
Apple offered no definitive guidance on Thursday night, as has been the firm's norm since the start of the pandemic. The firm did however, provide what CFO Luca Maestri referred to as "directional insights" during the call. The firm expects nearly 10 percentage points (not basis points) worth of negative year over year FX-related impact for the December quarter.
For this reason primarily, as well as tough comps regarding Mac sales and industry-wide slowdowns in advertising and gaming... the firm sees a deceleration in revenue growth from the quarter reported last night. Last night, the firm reported 8.1% revenue growth. Wall Street is already looking for growth of 3.6%, so I think this may already have been priced in.
Balance Sheet
According to the balance sheet, Apple ended the quarter with a net cash position of $48.304B, and inventories of $4.946B. This puts current assets at $135.405B. The firm ended the quarter with current liabilities of $153.982B, including $21.11B in commercial paper and term debt. That leaves the firm with a current ratio of 0.88. That's not "good." It's also down from 1.07 at year's end, which is "good." The firm's quick ratio now stands at 0.85, down from 1.02 over that same time frame.
Sarge, are you saying that the "current" quality of Apple's balance sheet has visibly deteriorated this year? Not exactly. I mean it has but it's not nearly as weak as it looks. Apple has $120.805B worth of marketable securities on the balance sheet not labeled as "current", so this is cash if they need it, but not quick cash. so not included in the net cash position.
Total assets add up to $352.755B. The firm makes no entry for intangible assets which it clearly could do in size. Total liabilities less equity amount to $302.083B including another $98.959B in term debt. This balance sheet is slightly weaker than it was. This balance sheet is not weak. I would like to see a higher cash balance on the current side. It's not a deal breaker for me.
Wall Street
I have found nine sell-side analysts that are rated at four or five stars at TipRanks and have also opined on AAPL since last night. Among the nine, there are seven "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings. The average target price across the nine is $176.89 with a high of $200 (Samik Chatterjee of JP Morgan) and a low of $156 (Tim Long of Barclays).
Once omitting the high and the low as potential outliers, the target price barely moves, dropping to $176.57. The average target price across the seven "buys" is $182.29, while the average target price of the two "holds" is $158.
My Thoughts
To be honest, I was impressed with these results, given the FX headwinds, and the thought to be large Covid-related problems in China. That said, I was also relieved given the carnage around (formerly) mega-cap tech this week. CEO Tim Cook, one of the best in the business, pulled "it" off again.
Apple remains in the trading range that it has been in for about a year. What I need to see right now is how the stock does at the 50 day SMA $152. So far, this looks like it could be resistance. I added last night much lower than where the shares opened so I do not need to add this morning. AAPL currently weighs about 3.4% on my book, which is fine. I try to keep this allocation between 3% and 3.5%.
That said, $152 becomes a moving pivot for me. If this pivot can be taken and held, it won't take much to make a run at the 200 day SMA. More resistance? Yes, but if AAPL can take both that will force portfolio managers to increase their exposure. It's asking a bit in this environment and everything right now is reliant upon the Fed's decision next week, but I have a $175 target on AAPL.
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