Current Price: $170 Price Target: $185
Position Size: 7.85% TTM Performance: +29%
Key Takeaways:
- Solid revenue beat as supply chain problems were less severe than expected. Semi shortages and Covid related manufacturing disruptions impacted Q1 by $6B less than the $10B expected.
- iPads were the weakest product as they were hardest by shortages – this was consistent w/ the guidance they gave last quarter
- Gross margins well ahead of guidance – 43.8% up 160 basis points quarter due to volume leverage and favorable mix partially offset by higher cost structures. Guidance was for 41.5 to 42.5% (up from <40% in 2020).
- China continues to be strong – +21% YoY growth, significantly growing the installed base.
- Guidance – Expect to achieve solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints. Supply constraints will be a smaller impact in Q2 than in Q1 (December quarter). They expect Services growth to decelerate as they lap tough compares.
Additional highlights:
- Seeing record demand – Q1 revenue was $124B, +11%, reached new all-time records in the Americas, Europe, Greater China, and the rest of Asia-Pacific and it was also an all-time record quarter for both products and services. They saw growth across every product category except iPad (due to supply chain issues)
- Segments:
- iPhone – revenue 58% of revenue, grew +9.2% YoY, well ahead of estimates. The iPhone 13 family continues to be in very high demand. Installed base is >1 billion devices.
- Mac – Revenues were up +25% YoY despite supply constraints. All-time record and the last 6 quarters for Mac have been its best four quarters ever.
- iPad – revenue was down -14% YoY due to significant supply constraints
- Wearables – revs were +13% YoY. Apple watch installed base continues to expand as more than 2/3 of Apple Watch buyers in the quarter were new to the product.
- Strong Services growth driven by growing installed base which hit a record of 1.8B
- Revenue +24% YoY; set a new all-time revenue record ($19.5B).
- Now at 785m subs, added 40m from Q4; and up 165m from last yr. and 5x the number of subs they had less than 5yrs. ago.
- 5G upgrade cycle – only in the early innings of 5G. If you look at their 5G penetration around the world, there is only a couple of countries that are in the double digits yet.
- Why we still like…
- Big moat underpinned by growing installed base which drives their virtuous cycle.. More users of their devices lures developers to create better apps which lures more users. This is key to their LT growth. Apple continues to significantly expand their installed base. And they have multiple new products being launched and more in the pipeline (e.g. AR glasses, Apple car) that could be key drivers of LT growth….and, importantly, a growing services business tied to all these products. Part of what differentiates Apple is they design their own silicon for the processor chips that are the brains of their iPhones and iPads and now their Macs, which gives them better control over performance and feature integration in their devices. This has proven to give them an advantage with the way they design their products and an advantage with developers. So, now they have Macs, iPhones and iPads running the same underlying technology which should make it easier for Apple to unify its apps ecosystem, including allowing iPhone and iPad apps to run on Macs. This advantage and the relevance of their ecosystem gets more and more important as computing power in phones increases, 5G delivers better connectivity and, as a result, we have the ability to use their devices in enhanced ways (w/ increased revenue opportunities) ….like apps that take advantage of augmented reality and IoT related technologies.
- Reasonable valuation…
- Trading at ~4% FCF yield on 2022 (a small premium to the S&P) and a 0.5% dividend yield w/ another almost 3% of their market cap ($80B) in net cash on their balance sheet.
- For reference, pre-pandemic in Jan 2020, Apple was trading at ~4.7% FCF yield and 1% dividend yield with ~7% of their market cap in net cash.
- Their market cap has been tracking their massive increase in FCF estimates. FCF this year should be ~80% higher than pre-pandemic fiscal 2019
- Huge amount of cash on their balance sheet w/ years of buybacks to support valuation
- Capital returns may need to expand further to hit their net-cash-neutral target in a few years.
- With current net cash of ~$80B and expectations of over $460B of FCF over the next 4 years, shareholder returns could be over $500B or almost 20% of their current market cap.
- They’ve returned >$550B since 2012. So, from 2012 to 2026, they may return >$1T.
$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