Mixed messaging.
Over the weekend, analyst Mike Ng of Goldman Sachs started coverage of consumer electronics giant Apple (AAPL) with a "Buy" rating and a target price of $199. The stock closed on Friday at $151.03. That's an implied upside of 31.8%. Ng mentioned the firm's installed base of 1.8B devices and the secular growth in services as drivers for what has been a rerating of the shares in terms of valuation. Ng sees the firm's services segment driving as much as 40% of gross profit by fiscal 2027.
Hey, isn't Mike Ng rated at zero stars by TipRanks? Did not Samik Chatterjee of JP Morgan, who is rated at five stars by TipRanks, downgrade Apple over the weekend to "Hold" just after reiterating a "buy" rating last week? Did not Chatterjee take his target price from $175 down to $109 while doing so? That new target would be almost a 30% downside move from Friday's close. Who's right? One analyst comes highly rated, but both represent highly prestigious broker-dealers.
Wasn't AAPL up 3.5% on Friday alone after positive commentary that came out of Morgan Stanley? Analyst Erik Woodring (one star), who also represents a prestigious broker-dealer, who rates AAPL as "Overweight" sees potential benefit in growth for both iPhone and services, and a gross margin that nears record levels as the idea of iPhone subscriptions once again changes the game for this firm. Woodring has a target price of $180 on the shares.
Where Is Apple Now?
I have not written on AAPL for about a month. It has been that long since Apple reported. Readers may recall that 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. The revenue print showed a year over year contraction of 5.5%. Operating income of $36,016B also missed. There were some wins.
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 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.
Bear in Mind...
- Products generated sales of $96.388B (-7.7%). 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%). 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.
Remember...
... That while Apple does not offer and did not offer specific revenue guidance or guidance on profitability, that some guidance was offered by Apple CFO Luca Maestri during that early February 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 then 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 did 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. This might be the rough time as Apple and Apple suppliers diversify operations away from China.
Deteriorating relations between China and the US might be the greatest threat to Apple's ability to prosper. Not on the production side, but on the consumer side, even if that is where Beijing is trying to take its economy.
Geographically Speaking (for the fiscal second quarter)...
- Americas generated sales of $49.278B (-4.3%).
- Europe generated sales of $27.681B (-7%).
- Greater China generated sales of $23.905B (-5%).
- Rest of Asia Pacific generated sales of $9.535B (-2.8%).
- Japan generated sales of $6.755B (+29.64%).
Even with the lumpiness of China's exit from its zero-Covid policies, Greater China still drove almost $24B in revenue for Apple. That's still more than 21% of Apple's global revenue pie.
Bottom Line
I am not sure of the above analysts, who is correct and who is not. There is risk. That is understood. I am willing to remain long Apple at this time and the fact of the matter is that I like the chart more now than I did a month ago.
Remember that Fibonacci level at $155? That spot held firm and even helped force a retest of the stock's 200-day SMA last week. Let's zoom in...
What has developed since is an almost perfect cup with handle pattern bearing a new pivot of $157. Relative Strength is better than neutral, while the daily MACD (Moving Average Convergence Divergence) could be starting to set up for a potentially bullish crossover. I am upping my target price for AAPL by $5.
Apple
- Target Price: $181 (up from 176)
- Pivot: $157 (up from 200-day SMA)
- Add: Down to recent low ($144)
- Panic: Loss of 50-day SMA (currently $141)
(Apple is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AAPL? Learn more now.)
