After Mixed Results, Apple Shares Expensive

Apple AAPL reported fiscal second-quarter results that came in below management’s prior guidance. On Feb. 17, Apple issued a press release that stated it no longer expected to meet its revenue guidance provided on Jan. 28. Management did not provide guidance for the June quarter given the lack of visibility. CEO Tim Cook noted the first five weeks of the March quarter were strong while the next five weeks were weakened by China’s response to coronavirus and the associated demand destruction and supply disruption in the country. The last few weeks of the quarter saw conditions in China improve while the rest of the world began facing shelter-in-place orders and closure of Apple’s retail stores outside of Greater China. When Apple rescinded its guidance in February, we had estimated a new revenue range of $56 billion to $60 billion. The firm ended up achieving $58.3 billion in sales for the quarter, which was up 1% year over year. We are maintaining our fair value estimate of $240 per share for narrow-moat Apple and we recommend prospective investors wait for a wider margin of safety given the tenuous state of the global economy.

Second-quarter revenue was modestly up thanks to year-over-year growth in services (17%) and wearables, home, and accessories (23%). Product revenue was down 3% year over year due to weakness across iPhone, iPad, and Mac segments. Apple generated nearly $29 billion in iPhone revenue, which was down 7% year over year. Service revenue was a quarterly record $13.3 billion. Apple now has over 515 million paid subscribers, 125 million more than a year ago, and the firm expects 600 million subs by December 2020. Wearables growth remained stellar with sales up 23% year over year. In its three largest regions, Apple’s sales had mixed results: down 1% in the Americas; up 10% in Europe; and down 8% in Greater China. Gross margin of 38.4% was flat sequentially as a mix shift toward services offset the seasonal loss of leverage.

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