It was as if a blizzard had hit Wall Street. All day long, the feeling had been risk-on. Equities, debt securities, you name it. After the close, in rapid-fire... Alphabet (GOOGL) , Amazon (AMZN) , and Apple (AAPL) all went to the tape with their (calendar) fourth quarter numbers.
All would disappoint in one way or another. Perhaps it would be more accurate to say that all would disappoint in a number of ways, though each disappointment came with its own individual characteristics.
Has the demand environment changed? Have these firms shifted from what we used to refer to as "growth" stocks to stable if not mature, cash-flow producing businesses? If that's the case, I think that a dividend, or at least a proper dividend is probably in order. Either that or the shareholders, who have been loyal, will start to walk. Away. Having said all of that, I see Apple in a better position going forward than the other two mega-caps. Let's dig in.
The Quarter
For the firm's fiscal first quarter, which ended December 31st, Apple posted GAAP EPS of $1.88 on revenue of $117.154B. These top and bottom-line numbers both fell short of Wall Street's expectations, while the revenue print showed a year over year contraction of 5.5%. While these headline numbers did miss, and while operating income of $36.016B also missed, a number of key metrics showed improvement. In key areas.
Readers will note that cost of sales came in below expectations as did operating expenses. Readers might also want to make note that Apple's installed base (all devices in use) surpassed the 2B mark, which is a record and is up over 100% from 2015. That's how a company, in this case the greatest consumer electronics company in history keeps its clientele, even if their individual gadget replacement cycle slows, captive so that the firm can continue to grow its services segment, a segment by the way that has also hit a new record.
Segment Performance
- Products generated sales of $96.388B (-7.7%), which was a miss. This came on a $66.822B cost of sales to produce gross income of $35.623B. That was good for a gross margin of 37%, down from 38% for the year ago period.
- iPhone generated sales of $65.775B (-8.2%), which was a miss.
- Wearables, Home & Accessories generated sales of $13.482B (-8.3%), which was a miss.
- iPad generated sales of $9.396B (+29.64%), beating estimates.
- Mac generated sales of $7.735B (-28.72%), which was a miss.
- Services generated sales of $20.766 (+6.4%), beating estimates. This came on a $6.57B cost of sales to produce gross income of $14.709B. That was good for a gross margin of 71%, down from 72% for the year ago period.
Geographically...
- Americas generated sales of $49.278B (-4.3%), which was a miss.
- Europe generated sales of $27.681B (-7%), beating estimates.
- Greater China generated sales of $23.905B (-5%), beating estimates.
- Rest of Asia Pacific generated sales of $9.535B (-2.8%), beating estimates.
- Japan generated sales of $6.755B (+29.64%), beating estimates.
Guidance
Apple does not offer specific revenue guidance or guidance on profitability. This has been the case since the start of the pandemic. Some guidance was offered by Apple CFO Luca Maestri during the earnings call.
Maestri said, "In total we expect our March quarter year over year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year over year performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year over year impact of 5 percentage points."
Maestri added, "For Services, we expect to grow year over year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds."
The firm does expect to see a gross margin of 43.5% to 44.5% for the current quarter, with operating expenses between $13.7B and $13.9B.
Balance Sheet
The firm ended the quarter with a cash position of $51.355B. It's really more than that, but I will get to that. Inventories now stand at $6.82B. This brings current assets to $128.777B. Current liabilities add up to $137.286B, including shorter-term debt of $11.483B. This puts the firm's current ratio at 0.94 and its quick ratio at 0.88. The quick ratio is fine, but usually one wants to see a healthy current ratio of more than 1.0 for any firm, but especially a large one like this. This is not a lousy balance sheet. Let me explain.
Total assets amount to $346.747B. The firm includes absolutely no intangible assets. The Apple name might be worth something. Just guessing. Included though are another $114.095B worth of marketable securities. Maybe they are not liquid. If added to cash, that would bring cash to $165.45B. Total liabilities less equity comes to $290.02B. This does include long-term debt of $99.627. So, after doing all of the figuring, a firm with a net cash position of $165.45B that runs with total debt of $111.11B can meet their obligations and then some.
Wall Street
Since these earnings were released last night, I have found 15 sell-side analysts that are both rated at four or five stars by TipRanks and have opined on AAPL. Across those 15 analysts, there are 13 "Buy" or by-equivalent ratings, and two "Hold" and hold-equivalent ratings. The average target price across the entire 15 is $174.33 with a high of $195, twice (Krish Sankar of Cowen and Harsh Kumar of Piper Sandler) and a low of $145 (Tim Long of Barclays). Once omitting one of those highs and that low as potential outliers, the average target across the other 13 rises to $175.
My Thoughts
I think that there is enough to like here. Forex is a drag, but with global central banks now tightening policy more quickly than is the Federal Reserve, this could abate somewhat. China's reopening and Apple's diversification into both India and Vietnam for production should ease supply chain disruptions, which had more to do with Apple's misses than a lack of demand.
Should the US economy enter into recession, getting the products segment back on track won't be easy, and Apple is not pretending that it will be. I think one thing is clear. Apple's disappointments are far more correctable, and their cash flow is far more diversified than anyone else who reported on Thursday evening. I am long AAPL. I will remain long AAPL.
On this morning's pop, AAPL has now completed a 61.8% Fibonacci retracement of the August through early January selloff. Relative Strength is almost too strong now. The daily MACD (Moving Average Convergence Divergence) agrees with Relative Strength. It would not surprise me to see the shares consolidate after this.
I am tempted to take profits. The main reason that I will not, is that these shares retook their 200 day SMA on Thursday and appear to have defended that line this morning. That's potentially huge. Portfolio managers have to act on that.
Apple
Target Price: $176
Pivot: $147 (200 day SMA)
Add: Down to pivot
Panic: Loss of 50 day SMA (currently $139)
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