Current Price: $138 Price Target: $157 (Increasing from $145)
Position Size: 8.3% (just reduced by 75bps) TTM Performance: +78%
Key Takeaways:
- Beat estimates on strong iPhone sales –Beat on revenue and EPS w/ beats across all segments except Macs (though Mac sales were very strong at +21%). iPhones sales were well ahead of expectations at +17% – growth benefited from an easy compare given the delayed iPhone launch (hit Q1 instead of Q4).
- Strong traction with new products –including 5G phones, M1 powered Macs, iPad Air, latest Apple watch and Air Pods
- Big improvement in China – 57% YoY growth, a record quarter in China aided by quick 5G adoption rate and US export restrictions hurting Huawei.
- No specific guidance – just guidelines, same as last quarter. They expect total company revenue growth in Q2 to accelerate on a YoY basis (seasonally smaller quarter, lapping early impact from Covid).
- CEO Tim Cook’s response related to a question on whether they need acquisitions to grow…“if you back up and look at the ingredients that we have at this point…we have the strongest hardware portfolio that we’ve ever had and we have a great product pipeline for the future… both in products and in services. We have an installed base that has hit new highs…and we’re still attracting a fair number of switchers and upgraders. We just set an all-time services record and we have that installed base to compound that, particularly with the services that we’ve added over the last year…I still think that we are in the early stages of [wearables]. If you look at our share in some of the other products, whether you look at iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion…particularly in some of the emerging markets… and we’ve been on a multi-year effort in the enterprise and have gained quite a bit of traction there. We are very optimistic about what we can do in that space. And then of course we’ve got new things that we’re not going to talk about that we think will contribute to the company as well.” (I’ve deleted some of what he said to shorten it)
Additional highlights:
- Total revenue was $111B, +21%. Their first >$100B quarter. EPS $1.68 vs street $1.42 aided by better than expected gross margins primarily from leverage from higher sales and to a lesser extent from a mix benefit.
- Enterprise market – positive commentary on the call related to companies switching from fixed phones to iPhones for employees and to increased Mac adoption in enterprise driven by WFH.
- iPhone: $65.6B (+17%) vs street $60.33B. Strong response to new models, especially Pro and Pro Max, leading to both unit and ASP growth. iPhone installed base now exceeds 1 billion handsets. Aging installed base combined with increased 5G availability should be catalyst for future iPhone sales. China was a key driver of growth and is a leading indicator of 5G as a catalyst. 5G service availability in China is ahead of the US and 5G capability in the new iPhone lineup was pointed to as a big driver of the +57% growth in the region. That being said, China is different than the US in terms of how reliant they are on phones as primary devices and greater penetration of things like mobile ordering – that might suggest an accelerated relevance of 5G to consumers there, but it does still underscore 5G as a longer-term catalyst. The other driver in China, of course, was a hobbled key competitor: Huawei. Trade sanctions have cut them off from key components and from Android apps.
- Tim Cook from the call re: China: “I think probably some portion of this was that people probably delayed purchasing in the previous quarter. As rumors started appearing about an iPhone. Keep in mind, 5G in China – the network is well established and the overwhelming majority of phones being sold are 5G phones. And so I think there were some level of anticipation for us delivering an iPhone with 5G and so iPhone did extremely well.”
- Services: $15.8B (+24% YoY) vs street $14.9B.
- The now have > 620 million paid subscriptions across their services platform up 140 million from a year ago. Beat their 600m goal for 2020.
- Installed base growth (which is a driver of services) has accelerated and is an all-time high across each major product category – 1.65B in total w/ over 1B of those being iPhones.
- Apple Pay growing as coverage continues to expand – nearly 90% of stores in the US now accept Apple Pay.
- Antitrust – no commentary on the call specifically on antitrust – the services segment is the focus of scrutiny, specifically related to Apple’s high (~30%) fees. While no suit has been filed against AAPL, in response to the scrutiny they are facing, Apple lowered App store commissions to 15% for developers earning less than $1m/yr. The change was inconsequential to Apple as it represents a small portion of their fees but the improvement to the economics for developers could actually be a catalyst to new/better apps…Tim Cook said, “we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store.”
- Wearables & Accessories: $13B (+30% YoY) vs street $11.5B.
- Wearables business is now the size of a Fortune 120 company.
- Apple Watch continues to extend its reach with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product.
- Mac: $8.68B (+21%) vs street $8.86B
- Installed based is growing w/ about 50% of purchases coming from people that are new.
- Strong demand for the new MacBook Air, MacBook Pro and Mac Mini -all powered by brand new M1 Chip…which could have been a contributor to GM expansion in the quarter.
- iPad: $8.44B (+41%) vs street $7.57B
- Similar to Mac, installed based is growing w/ about 50% of purchases coming from people that are new.
- “it’s clear that some people are using these as laptop replacements”
- Specific guidance not given, just broad guidelines – consensus should go up as street generally raising estimates. For Q3, total company revenue, “we believe growth will accelerate on a year-over-year basis.”
- Ended the quarter with almost $196B in total cash and $84B in net cash. Returned >$30 billion to shareholders during the quarter with $3.6B in dividends and over $24B in share repurchases (up from $18B last quarter).
- Trading at ~3.5% FCF yield on 2021 w/ another ~3.5% of their market cap in net cash on their balance sheet.
$AAPL.US
[category earnings]
[tag AAPL]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109