Strong iPhone Sales for Apple; Tepid Holidays Expected

Abhinav Davuluri: Apple reported solid September quarter results thanks to 10 days worth of iPhone XS and XS Max sales as well as continued strength across these services and wearables businesses. However, expectations for the guidance of the December quarter fell short of our view of about $93.5 billion versus management's range of $89 to $93 billion.

Two reasons driving this, one being FX had wins of about $2 billion, as well as the fact that the iPhone X launched last year, was part of the December quarter, versus this year the XS and XS Max were part of the September quarter of this year, thus distorting the year over year iPhone compare.

Additional cause for concern came from the fact that management will be no longer disclosing the unit data for the iPhone, iPad, and Mac, thus reducing the transparency for how the iPhone growth story's going. In our view, this is becoming more of an ASP driven story versus unit one, so it does make sense to an extent, however we always like to see solid transparency in terms of understanding how this business is faring. Though on the plus side the firm will be disclosing gross margins for the product and services businesses which should help understand how Apple is evolving to more of a ecosystem approach versus a pure hardware company.

Shares are trading slightly above our unchanged fair value estimate of $200 per share, and we recommend a wider margin of safety before committing capital to narrow-moat Apple.