I disagree with the renewed bullish consensus (and the market's positive reaction) to Apple's (AAPL) quarterly sales and earnings performance - the later which was less bad than consensus expected.
The quarter provided more evidence that hardware sales are shrinking (as the replacement cycle is growing more elongated) and already the rate of growth in service revenue. Service revenue is slowing (and is not enough to move estimates meaningfully over the near- to medium- term).
While services is a larger and richer part of the business ($11.5 billion in the quarter), there is growing and continued evidence that the iPhone business ($31 billion in the quarter) is increasingly cyclical and mature and even faces aggressive local competition. The same is true about the $5 billion (per quarter) iPad and Mac segments. (Wearables are growing faster but, too, represent only about $5 billion/quarter).
The dilemma facing the company is that iPhone sales can continue to fall over the next five years as the product replacement cycle likely moves from two to two and a half years to almost four years. This will produce a material headwind and makes the installed base more vulnerable than many investors assume. Moreover, a paradigm shift of the hardware business is not out of the question that would further jeopardize that installed base.
Apple is essentially a return of capital story and while its share price will be somewhat supported by another (which was expected) buyback - upside will be a function of a valuation rerating higher, something I see difficult for this still hardware-centric tech company which is already trading at a near five year peak multiple (after having traded at a 25% discount only six months ago).
Stated simply, its not clear to me that Apple should enjoy that five year peak multiple today.
Apple had a bounce back from the weak prior quarter.
* Revenue of $58.0 billion, down from $61.1 billion a year ago, but above the $57.49 billion expected. This was another total annual revenue decline for Apple.
* EPS of $2.46, down from $2.73 a year ago, but also above the $2.37 expected.
* iPhone Revenue of $31.05 billion, Exp. $30.50 billion, down 17% Y/Y from $37.6 billion.
* Service Revenue $11.45 billion, up 16% from $9.850 billion (a slowdown in the rate of growth).
* The company continued its active buyback program in the quarter.
Going into the quarter, Apple's operating expectations were low and the company modestly beat those reduced expectations.
To me, Apple, at current prices, can not be viewed as either a value stock (it's trading at the market's multiple) nor as a growth stock (as, in the aggregate, it's not growing).
Apple is still a mature hardware company and despite strong (but a slowing rate of) service growth - the aggregate top line outlook for the company over the next few years is not vibrant or exciting.
Indeed sales are not growing and gross margins have been declining over the past few years - and it is unrealistic to expect the services business (who's growth rate has already dropped from the mid +20% growth rate to +16% already) to meaningfully offset the maturing phone business.
Today Apple is trading much higher on strong price momentum - which is feeding upon itself, perhaps as institutional investors are forced (because of the large weighting of the stock) to increase their exposure.
I am skeptical of the notion that the new and enlarged buyback (of $75 billion, on top of the remaining $38 billion left from the previous buyback) will buoy the shares. This is a weak argument to own the stock (as it obviously didn't in the fourth quarter of 2018!).
I just added (small) to my short at $214.
Though I currently only have a small dog in the Apple hunt (I covered some of my short last night on the EPS release), I will likely expand my small short in the stock on any further share price strength from here.
(This commentary originally appeared on Real Money Pro on May 1st. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)