Wall Street reacts to Apple's strong Services and Wearables growth [u]

Posted:
in AAPL Investors edited October 2019
Analysts have passed comment on Apple's record fourth quarter results for the fiscal year 2019, with investor expectations and analyst estimates being beaten in a variety of ways, though the lower iPhone revenue is suggested to be an indicator of challenging December quarter results.




For the fourth quarter, Apple earned $64 billion in revenue, earning a profit of $13.69 billion during the period. With iPhone revenue down 9% year-on-year at $33.36 billion, the shortfall from the key product's revenue was mitigated by sales from a number of other areas growing year-on-year.

Services saw its growth continue in a predictable fashion at 18% to 12.52 billion, with iPad also up from $4.1 billion last year to $4.66 billion, and wearables rising a meteoric 54% from last year at $6.52 billion for the quarter. Mac revenue fell slightly from $7.4 billion to $6.99 billion.




Prior to market opening on October 31, Apple stock pricing is at $247.30, an over $4 per share gain since the earnings report was issued.

Cowen and Company

Reiterating its "Outperform" rating on the stock the iPhone business is performing "better than market expectations in the near term." The iPhone 11 product family "is being received well by consumers and this could drive a re-rating in shares," the firm suggests, "especially as a potential low-cost SE2 in C1H20 and a 5G iPhone by C4Q20 could be additional catalysts in the coming year."

The better-than-expected results prompted a raise in Cowen's 2020 iPhone units forecasts, and a raising of its price target from $250 to $290.

Services' growth is "robust" as a number of sub-segments like the App Store, AppleCare, Apple Music, and iCloud "reach new all-time highs." The Services growth is "a testament to Apple's ability to navigate the difficult macro head winds with its pricing strategy."

Chinese revenues are also thought to have recovered despite dipping 1% year-on-year, as last year it was seeing 20% shrinkage, with iPhone pricing, wearables growth, and "key game approvals" assisting Services growth in the region.


Rosenblatt Securities

The 1.58% year-on-year revenue increase is "mainly driven by the wearable segment" and primarily from AirPods, Rosenblatt claims, though this is of limited use to the company as it "does not bring much upside to iOS services" at all. "We believe the lack of upside to services from wearables is why the Street gives low multiples to wearable companies."

Despite seeing a resuscitation of revenue for Greater China, Rosenblatt believes "Apple still has yet to face its biggest challenge in China, which is the upcoming launch of 5G service in November as well as the coverage for 5G service expanding to 100 cities by the middle of 2020." The firm expects Apple's market share in the region to decline with the growth of 5G in the country.

Globally, the initial 5G cycle will provide two challenges to Apple, in the form of mmWave systems "overheating" and the higher costs and resulting retail pricing. "We believe it may not make sense for Apple to launch a low-end 5G version for the iPhone 12 (the next upgrade from the iPhone 11) due to our estimate that retail prices may start ~$900. We think it makes more sense for Apple to launch both a 4G and 5G model for the iPhone 12 Pro, while just a 5G model for the iPhone 12 Pro Max."

It is expected the 5G model of the "iPhone 12 Pro" will be roughly $300 more than the 4G-equipped version. The price rise may be too high, with Apple tipped to ship a total of 20 to 30 million 5G iPhones in the 2020 calendar year.

The December quarter guidance of $87.5 billion "suggests slight iPhone revenue growth," which Rosenblatt models at around $52.5 billion in the quarter, slightly up from $52 billion last year. "With the earlier launch of new iPhone models and the upcoming production of the iPhone SE2, we do not think slight y/y growth from iPhone revenues will bring much excitement."

Rosenblatt rates Apple as "Sell" with a price target of $150. Zhang's predictions for Apple stock pricing has trailed reality for about four years.


J.P. Morgan

Apple "managed to clear even the high hurdle of investor expectations," J.P. Morgan's investor note starts, with the higher revenue demonstrating Apple is able to "comfortably offset margin dilution from sales of a higher mix of lower-end iPhones." The leverage impact will "drive higher investor confidence in gross margin expansion medium-term," due to overall revenue growth and a potential return to growth for iPhone revenue.

The improvements resulted in J.P. Morgan raising their revenue and margin forecasts, and its price target from $275 to $280.

"Investors might be wary of sales momentum carrying into December quarter," the firm reasons, but "discussions with the company indicate greater confidence in the revenue forecast." Additionally, the higher portion of Services revenue that consist of subscriptions "drives higher visibility into the guide."

Both better iPhone pricing and Services momentum have "long-term implications" for the company, with the latter's likely "higher monetization of the installed base" a good sign for the future. Apple "remains on track for paid subscriptions to exceed 500 mn in 2020," J.P. Morgan insists.

Morgan Stanley

Calling the quarter "Clean Across the Board, Morgan Stanley notes the iPhone 11 cycle is "strong out of the gate" with iPhone replacement rates nearing a ceiling and "setting up for improving and more stable growth in the medium-term." Battery and camera innovation, more affordable pricing, and trade-in and financing offers are "proving catalysts for stronger upgrade rates," allowing iPhone to beat the firm's forecast.

Services growth acceleration "should continue" with more driving by AppleCare and the App Store alongside new services like Apple TV+ and "to a lesser extent" Apple Arcade and Apple Card. Gross margins for Services going forward are tipped to contract "due in part to the inclusion of Apple TV+," though the sequential growth in high-margin services like the App Store and iCloud could "act as a more meaningful offset" than Morgan Stanley currently models.

On the subject of wearables, Morgan Stanley claims "We believe Apple Watch and AirPods penetration among the iPhone installed base remains far below mature levels, and considering 3 of every 4 Apple Watch customers are new to the device, expect a long growth runway going forward."

Morgan Stanley has set a new price target of $296, with AAPL remaining the firm's "top pick for 2020."



Comments

  • Reply 1 of 18
    BebeBebe Posts: 145member
    Apple is no longer just an iPhone company anymore. 
    razorpitj.travaultradelreyjones
  • Reply 2 of 18
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
  • Reply 3 of 18
    razorpitrazorpit Posts: 1,796member
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    Apple has learned well from the Google/Amazon/Facebook/Twitter group.
    Metriacanthosaurus
  • Reply 4 of 18
    j.travaultraj.travaultra Posts: 2unconfirmed, member
    Price target 320$ in first quarter 2020 (mainly thanks services) Highly recommendation invest money to apple stocks....
  • Reply 5 of 18
    lkrupplkrupp Posts: 9,989member
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    All you are doing is regurgitating nonsense conjured up in the imagination of some hater. You cannot provide one single piece of credible evidence that this is the truth. All you have are opinions by anonymous financial wannabes who don't have a clue either. Pretty dumb of you.
    lolliver
  • Reply 6 of 18
    You can use sleazy accounting to paper over a few quarters of weak performance. When you consistently achieve stellar results like Apple has for the past 10 years with the exception of maybe two quarters where they missed expectations, it's called visionary leadership and consistent hard work. Well done, "Tim Apple."
    delreyjonesJWSCretrogustololliverRonnnieO
  • Reply 7 of 18
    blastdoorblastdoor Posts: 2,651member
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    JWSC
  • Reply 8 of 18
    razorpit said:
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    Apple has learned well from the Google/Amazon/Facebook/Twitter group.
    Google, Amazon and Twitter all sell Hardware.. as well as a product (bits of tat or YOU)
    Apple sells Software and Services and Hardware.

    If anything, they have and are learning fast from Apple. Vertical Integration is what it is all about.

  • Reply 9 of 18
    spice-boyspice-boy Posts: 1,448member
    I guess the Tim Cook haters were wrong.... again. Personal politics didn't lose Apple a dime. 
    StrangeDays
  • Reply 10 of 18
    blastdoor said:
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    Of course in terms of the recent history of Apple’s P/E,  you’re correct that 21 is high, so you may be correct in your bearish assessment.  But it’d be great if you could contextualize your concern about 21 and explain why it’s high when we realize Microsoft and Google are at 27, Facebook is 31, and Amazon is 78.  If 21 is high for Apple, aren’t these other values even higher for the competition?  Why is this?
    StrangeDaystmaySpamSandwichlolliver
  • Reply 11 of 18
    hentaiboyhentaiboy Posts: 1,249member
     It is expected the 5G model of the "iPhone 12 Pro" will be roughly $300 more than the 4G-equipped version”.

    Why? Apparently existing  5G phones require two modems - one for 4G and the other for 5G but that’s set to change next year.
    edited October 2019
  • Reply 12 of 18
    blastdoor said:
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    Of course in terms of the recent history of Apple’s P/E,  you’re correct that 21 is high, so you may be correct in your bearish assessment.  But it’d be great if you could contextualize your concern about 21 and explain why it’s high when we realize Microsoft and Google are at 27, Facebook is 31, and Amazon is 78.  If 21 is high for Apple, aren’t these other values even higher for the competition?  Why is this?
    For my money, P/E has never been a good metric. Stocks are clearly more valuable based on perception, not reality.
    lolliver
  • Reply 13 of 18
    blastdoor said:
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    Of course in terms of the recent history of Apple’s P/E,  you’re correct that 21 is high, so you may be correct in your bearish assessment.  But it’d be great if you could contextualize your concern about 21 and explain why it’s high when we realize Microsoft and Google are at 27, Facebook is 31, and Amazon is 78.  If 21 is high for Apple, aren’t these other values even higher for the competition?  Why is this?
    For my money, P/E has never been a good metric. Stocks are clearly more valuable based on perception, not reality.
    I'd agree with you there, but I'm hoping to hear from Blastdoor.  I'm actually with Horace Dediu who says:  "Cash-flow is a fact; profits are an opinion; P/E is a dream."
    SpamSandwich
  • Reply 14 of 18
    JinTechJinTech Posts: 858member
    razorpit said:
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    Apple has learned well from the Google/Amazon/Facebook/Twitter group.
    Google, Amazon and Twitter all sell Hardware.. as well as a product (bits of tat or YOU)
    Apple sells Software and Services and Hardware.

    If anything, they have and are learning fast from Apple. Vertical Integration is what it is all about.

    Twitter sells hardware?
  • Reply 15 of 18
    blastdoor said:
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    I think you’re absolutely right that the justification for the previous low P/E and the current slightly higher P/E is that the revenues are shifting to a higher mix of recurring vs. single-product (iPhone). The P/E always seemed unreasonably low to me and others who have seen iPhone revenues as essentially recurring, since a high percentage of customers can be relied upon to replace their iPhone with another iPhone every few years. I understand both perspectives, but I don’t think that we’re likely to return to the days of single-digit ex-cash P/E anytime soon, barring a huge market crash or other large disaster. 
    delreyjones
  • Reply 16 of 18
    blastdoorblastdoor Posts: 2,651member
    blastdoor said:
    It is a huge deal that Apple is showing an ability to grow revenue from something other than the iPhone. 

    In the short term, though, the stock seems a bit pricey. Since 2007, I've had the impression that when the P/E goes above 17, AAPL is likely due for a correction. Currently, the P/E is almost 21. 

    On the other hand... one reason Wall Street might have been skeptical about AAPL in the past was a concern that they were too dependent on one product. Perhaps if Apple can show revenue+profit growth across multiple products, Wall Street might tolerate a higher P/E. 

    Still, I suspect that between now and the middle of next year AAPL will experience a noticeable downturn. I'm just not sure when. 
    Of course in terms of the recent history of Apple’s P/E,  you’re correct that 21 is high, so you may be correct in your bearish assessment.  But it’d be great if you could contextualize your concern about 21 and explain why it’s high when we realize Microsoft and Google are at 27, Facebook is 31, and Amazon is 78.  If 21 is high for Apple, aren’t these other values even higher for the competition?  Why is this?
    Wall Street understandably likes monopolies, and so far as I can tell, Google, FB, and Amazon are much closer to being monopolies than Apple. Also, companies (like Apple) that primarily sell to consumers are viewed as riskier (because consumer taste seems fickle) than companies that sell to other businesses (like Google and Facebook -- remember, their customers aren't you and I, but rather advertisers). Amazon sells to consumers, too, but they have a huge marketshare in on-line retail. Plus AWS is a big money maker and those customers are businesses. 

    That's not to say that I personally think those companies are a good buy -- I don't. I'd rather own Apple, and despite selling quite a few shares, I do still own quite a few shares. But I think I understand why Wall Street looks at things the way they do. 
    delreyjones
  • Reply 17 of 18
    lkrupp said:
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    All you are doing is regurgitating nonsense conjured up in the imagination of some hater. You cannot provide one single piece of credible evidence that this is the truth. All you have are opinions by anonymous financial wannabes who don't have a clue either. Pretty dumb of you.
    LOL. I guess you missed the fact that Apple has already said they are doing this. Where do you think I got the number from? They are counting every hardware that includes a year of Apple TV+ as $60 of annual services revenue.

    So how dumb is it now, knowing that this is directly from Apple?
  • Reply 18 of 18
    lkrupp said:
    Just wait until Apple starts reporting $60 per hardware sale as Apple TV + revenue mixed in with the services total.

    Amazing. No one in the world ever has to watch a single episode, and it will be reported as one of the most successful services of all time. Amazing what sleazy accounting can accomplish!
    All you are doing is regurgitating nonsense conjured up in the imagination of some hater. You cannot provide one single piece of credible evidence that this is the truth. All you have are opinions by anonymous financial wannabes who don't have a clue either. Pretty dumb of you.
    LOL. I guess you missed the fact that Apple has already said they are doing this. Where do you think I got the number from? They are counting every hardware that includes a year of Apple TV+ as $60 of annual services revenue.

    So how dumb is it now, knowing that this is directly from Apple?
    That’s not what Apple said. Apple will, of course, be deferring some revenue from those hardware sales to account for the bundled TV service. But it won’t be $60 per device. Considering all of the factors which Mr. Maestri indicated would go into the the consideration of how much should be deferred, I doubt it will be anywhere near $60 per device.

    At any rate, Apple did not say it would be $60 per device. Apple was asked about this on the conference call and Mr. Maestri didn’t give a number but pretty clearly indicated that it wouldn’t be that full amount.
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