Loyal Users Will Benefit Apple Even as China Weighs

Abhinav Davuluri: Apple reported first-quarter results in line with the firm's revised guidance from Jan. 2. Positively, non-iPhone segments, including services, Mac, iPad, and wearables and 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 after the report, as we believe the market is 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 onward, following a modestly lower fiscal 2019.

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, and Apple's battery replacement program that prolonged upgrades, as well as the aforementioned weakness in China. While the first three factors appear more transitory in nature, we have significantly cut our iPhone unit forecast for China going forward, as we anticipate a more competitive environment with lower switching costs in the region. Intensified by the current tepid macroeconomic backdrop in the region, and U.S.-China trade tensions.

We note the firm's active-install base for iPhones for the past 900 million devices during 2018, 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.