Apple Faces Headwinds in 2019, but Shares Look Cheap
We think Apple will resume mid-single-digit sales growth in fiscal 2020 despite the potential for continued weakness in China.
Apple (AAPL) reported fiscal first-quarter results in line with the firm’s revised guidance from Jan. 2. Positively, non-iPhone segments (services, Mac, iPad, and wearables/accessories) grew 19% year over year led by stellar services and wearables growth. After factoring in near-term iPhone headwinds in China and emerging markets, management’s outlook for the second quarter was relatively consistent with our expectations. Shares rose nearly 6% during after-hours trading, as we believe the market was expecting far worse.
We are maintaining our $200 fair value estimate for narrow-moat Apple, as we anticipate the firm resumes mid-single-digit sales growth from fiscal 2020 onwards following a modestly lower fiscal 2019.
First-quarter revenue fell 4.5% year over year to $84.3 billion, as iPhone sales fell 15% and non-iPhone sales grew 19%. CEO Tim Cook attributed the iPhone challenges to negative foreign exchange fluctuations (as a stronger dollar made iPhones more expensive in many emerging regions), reduced carrier subsidies, Apple’s battery replacement program that prolonged upgrades, and the aforementioned weakness in China. While the first three factors appear more transitory in nature, we have significantly cut our iPhone unit forecasts for China going forward as we anticipate a more competitive environment despite the current tepid macroeconomic backdrop in the region and U.S.-China trade tensions.
We note the firm’s active installed base for iPhones surpassed 900 million devices (up nearly 75 million in the past 12 months) and supports our thesis of a rich and loyal customer base from which Apple can extract services and wearables revenue. Second-quarter sales are expected to be in the range of $55 billion and $59 billion, with the midpoint implying a 7% year-over-year decline. CFO Luca Maestri cited $1.3 billion in foreign exchange headwinds along with a weaker macroeconomic climate, particularly in emerging markets.
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Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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