Disappointed in Apple (AAPL) ? Don't be.
The September product launch event failed to ignite interest in the stock of Apple. This is not unusual. Markets generally either yawn or actually sell the stock in the wake of this annual event. The difference this time was that the stock sold off for the six weeks leading up to the event.
Then that selling accelerated rapidly last week as the Wall Street Journal reported that Beijing had banned government employees and workers for government contractors from using foreign devices such as smartphones at their places of work. This ban, which has not been confirmed by the Chinese government, would obviously be primarily aimed at Apple, as Huawei, the Chinese telecom giant, had released that firm's first smartphone in years a week earlier.
In the past, we have seen the stock run higher into the launch, thus better justifying the following disappointment. So, what's up with Apple? "Own it, don't trade it" has been Wall Street's mantra, coined by TheStreet's founder, Jim Cramer.
Even now? Let's think about this.
First off, no major surprises came out of Cupertino on Tuesday. Actually, I'm not sure there were very many minor surprises to speak of. Apple unveiled the new iPhone 15 series. There are four versions, and no price hikes from the year ago pricing for the iPhone 14 series. The most notable change will be the USB-C charging ports. Newer iPhones will, in accordance with European Union regulation, be forced to use the same chargers as most consumer electronics products. The tangle of wires currently stuffed in your desk draw will soon be obsolete.
As with past versions of the iPhone, there will be an iPhone 15 ($799), iPhone 15 Plus ($899), iPhone Pro ($999) and iPhone Pro Max ($1,199). The one change is that there will only be a 256GB version of the Pro Max this year. Apple has dropped the 128GB version.
Concerning physical and operational advancements, Emergency SOS has been expanded for roadside assistance in locations lacking cell signals. "Dynamic Island" is being introduced to all models. This will supposedly improve overall functionality without users noticing. The Pro Models will have a titanium housing allowing for a smaller form factor that maximizes the large screen. Users will also be able to record to an external drive.
Additionally, the Pro models will be able to capture certain video providing for an enhanced viewing experience that could play into connecting the smartphone to the Vision Pro mixed reality headset when that product becomes a reality, thus enhancing and reinforcing the Apple ecosystem.
After smartphones, the next updated products were the Apple Watches. The firm is launching the Apple Watch Series 9 that will come with up to 36 hours of battery life (on low power mode) and the titanium housed Apple Watch Ultra 2, that on lower power, will be able to last up to 72 hours. The Series 9 will retail for $399, the Ultra 2 for $799. These prices, like with the iPhones, are unchanged from last year.
Both versions of the Watch will come with an improved and more powerful chip inside allowing for more processing power. The interesting update to the Watches was the "double tap" where a user will be able to answer and end calls, play and pause music and control the primary button on most apps by double tapping their index finger to their thumb.
So, what is the purpose of releasing updated products annually, even when there are no groundbreaking updates in the midst? Most folks do not update every year. (By the way, the update for Apple Watch Series 10 next year is supposed to be a doozy.) I am still using an iPhone 10. I think one of my sons is still using an iPhone 8. What we all are is in the Apple ecosystem. It's so much easier to just stick with Apple than to switch to something else once entrenched. In addition, when you wait a number of years, like I have, the new phone will feel like a major update, because it will be from what I have.
Why is keeping folks in the Apple ecosystem so important? Let's look back at the most recent quarter (the fiscal third) that the firm reported back in early August. Apple posted a GAAP EPS of $1.26 on revenue of $81.797B. While the bottom line print decisively beat consensus, the top line just met expectations and reflected a 1.4% year over year contraction.
However, while revenues contracted 1.4%, the cost of those sales decreased 3.6% to $45.384B. producing gross income of $36.413B. This worked out to a gross margin of 44.5%, up nicely from 43.3% a year ago. Digging deeper, the cost of products-driven sales printed at $39.136B, producing products-driven gross income of $21.448B, as products-driven gross margin hit the tape at 35.4%. The cost of services printed at $6.248B, resulting in a services driven gross income of $14.965B. Services gross margin hit the tape at 70.5% for the quarter.
To summarize... firm wide gross margin was 44.5%, but that was services gross margin of 70.5% driven by an ecosystem provided through the sale of the firm's consumer electronics products, despite a products gross margin of just 35.4%. The products are the still profitable key that unlocks the highly profitable services provided within the ecosystem.
The Next Step
We're all familiar with the Apple ecosystem... Apple Music, Photos, iCloud, even working out is all within the scope of this "cyber world." However, this also includes financial services. Now, we're talking about the Apple Pay digital wallet, Apple credit card... co-branded with Goldman Sachs (GS) , the Apple Savings Account... also co-branded with Goldman Sachs that now has more than $10B in deposits and yields something like 4.2%, and the Apple "pay in 4" loan service, which competes in the "Buy Now, Pay Later" space.
Estimates are that Apple Pay processed at least $600B in payments in 2022. This is a direct attempt to disrupt the "ease of use" cash transfer apps operated by Venmo, which is a PayPal (PYPL) business and Block (SQ) . Further up the food chain, the credit card companies, while not under direct fire, could start to see some erosion in market-share.
Fundamentals - Cash Flows and Capital Returns
For that most recent quarter, Apple drove operating cash flow of $26.38B, out of which came $2.093B in CapEx. This left free cash flow of $24.287B, which was up 47% year over year. Apple returned more than $24B in capital to shareholders during that quarter.
For the first nine months of the fiscal year, Apple had generated operating cash flow of $88.945B (-9.3% y/y). Out of this came CapEx of $8.796B, which left free cash flow of $80.149B. While this was down from the year prior, this is still massive.
Over the first nine months of the fiscal year, Apple repurchased $56.547B in common stock for the firm's treasury and paid out $11.267B in cash dividends. Apple has stuck to a policy of returning free cash flow to shareholders unless used for other corporate purposes. Apple has also paid down $17.122B worth of debt and paid $5.119B in taxes related to the settlement of equity awards.
Fundamentals - Balance Sheet
Looking at the balance sheet, Apple ended their third quarter with a cash position of $166.543B. Not all of this is considered current as more than $104B is invested in longer-term marketable securities. The "current" cash position stands at $62.482B. Inventories ended the quarter at $7.351B, leaving current assets at $122,659B. Current liabilities added up to $124.963B, including $7.216B in shorter-term debt and $3.993 in commercial paper. By the letter of the law, this puts Apple's current ratio at 0.98 and its quick ratio at 0.92.
However, those ratios are misleading. Apple had at that time, deferred revenue of $8.158 on the balance sheet. Omitting deferred revenue takes the current ratio up to 1.05. Now, if the entire cash position were to be labeled as "current" that would then take the 'adjusted" current ratio up to 1.94. In other words, Apple still has plenty of muscle.
Total assets amount to $335.038B, including absolutely no value for any intangibles, which is impressive. Total liabilities less equity came to $274.764B. That does include another $98.071B in longer dated term debt. The debt load does seem like a lot. That's because for so long credit was dirt cheap. The firm can easily pay off its entire debt-load out of cash and still leave an enviable cash position. This balance sheet is just fine.
Since the event in Cupertino on Tuesday, I have come across nine sell-side analysts that have both opined on AAPL and are rated at a minimum of four stars by TipRanks. Among these nine, there are seven "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings. The average target price across the nine is $212.56 with a high of $240 (Atif Malik of Citigroup) and a low of $180 (Tim Forte of DA Davidson). Once omitting those two as possible outliers, the average target across the other seven rises to $213.29.
I have taken a few shares off in order to protect myself, but I remain long AAPL and I still believe in the shares over the longer-term. Strong balance sheets and huge cash positions that come bearing massive operating and free cash flows are not to be ignored.
The view from 10,000 feet illustrates the violent reaction to the closing of the stock's rising wedge pattern. These patterns are typically resolved in bearish fashion. This has happened in late July/early August. Now, we zoom in.
Readers will see the formation of a cup pattern that has now potentially added a handle. As long as this September portion of the selloff does not exceed the downside lows of August, this developing "cup with handle" is still in play.
Readers will note the $190 pivot point, as well as two unfilled gaps north of the last sale. The first gap needs to see $181.50 to fill, and the second needs to see $191, which would spring the pivot.
Triggering the $190 pivot could unleash a target price of $228, or more conservatively... $218. My thinking is that the stock can be bought down to that August low ($172). That said, investors will need to be fully aware of the 200 day SMA (simple moving average) at $164. A break of this line is a firm panic point. I would allow the stock to pierce that line but not break contact. A failed upside test of that line from below would trigger a significant reduction in exposure for me.