Apple Records New June Quarter Highs; FVE up to $124

Apple AAPL reported fiscal third-quarter results ahead of our expectations led by the iPhone segment. The firm did not provide guidance the last five quarters and once more refrained from offering specific financial expectations due to uncertainty regarding COVID-19. Apple’s iPhone revenue grew 50% year over year to $39.6 billion, thanks to the new 5G iPhone 12 family. Although we anticipate strong double-digit iPhone growth in 2021, we think growth rates will moderate in the coming years as the 5G upgrade cycle matures. We are raising our fair value estimate for narrow-moat Apple to $124 per share from $115 as we incorporate a stronger near-term outlook due to the current 5G iPhone cycle and ongoing work- and learning-from-home dynamics bolstering Mac and iPad segments. Nonetheless, we think shares are currently overvalued, as we think recent growth trends could be unsustainable past 2021.

Third quarter revenue was up 36% year over year thanks to growth in iPhone (50%), iPad (12%), Mac (16%), services (33%), and wearables, home, and accessories (36%). We note all segments faced an easier year over year compare due to the June 2020 quarter being negatively impacted by COVID-19. On the services front, Apple now enjoys over 700 million paid subscribers. Greater China sales were up 58% year over year, which we attribute primarily to the 5G iPhone. Gross margin of 43.3% was up 80 basis points sequentially due to a stronger product mix.

Management anticipates double-digit year-over-year growth for the September quarter, though at a slower rate compared with the June quarter. Meanwhile, supply constraints for the iPhone and iPad are expected to worsen in the September quarter relative to the June quarter. We suspect these constraints are skewed mostly to chips and components made on older process technologies, rather than high-end chips made at TSMC.

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