Apple Delivers on Services, Wearable Growth Strategy

Apple AAPL reported third-quarter results that mimicked recent quarters, as strong showings from services and wearables segments compensated for softer iPhone sales. Although we continue to anticipate continued momentum in both services and wearables revenue, we foresee the upcoming iPhone launch in September likely being more marginal in nature. Consequently, we don’t anticipate a major rebound in iPhone unit sales, particularly as customers await a 5G iPhone model in 2020. We are maintaining our $200 fair value estimate for Apple and would recommend prospective investors seek a wider margin of safety before committing capital to this narrow-moat behemoth.

The firm generated $53.8 billion in sales for the quarter, up 1% year over year (and 4% in constant currency). Product sales were $42.4 billion, down 2% year over year as weaker iPhone sales were partially offset by Mac, iPad, and wearables. Notably, product revenue ex-iPhone grew 20%, as Mac, iPad, and wearables grew 11%, 8%, and well over 50%, respectively. We note that iPhone declines appear to have stabilized, with iPhone sales down only 12% year over year versus 17% last quarter. CEO Tim Cook highlighted Greater China as an area of improvement, as Apple returned to growth (in constant currency) for the quarter, including sequential improvement in every product category. Cook cited the collective effects of government stimulus, greater trade-in and financing programs, and other sales initiatives. We expect the competitive environment in China (and many parts of Asia) to remain intense as many Android-based alternative boast attractive features (large screens, multiple cameras, and in-display fingerprint sensors) often at a fraction of the cost of an iPhone. However, we think Apple has responded well in recent quarters with the aforementioned actions, particularly in China.

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