Apple's March-Quarter Sales Beat; Lift FVE to $115

Apple AAPL reported fiscal second-quarter results ahead of our expectations, led by the iPhone segment. The firm did not provide guidance the last four quarters and once more refrained from offering specific financial expectations due to uncertainty regarding COVID-19. Apple’s iPhone revenue grew 66% year over year to $47.9 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. We are raising our fair value estimate for narrow-moat Apple to $115 per share from $98 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.

Second-quarter revenue was up 54% year over year thanks to growth in iPhone (66%), iPad (79%), Mac (70%), services (27%), and wearables, home, and accessories (25%). We note the iPhone segment benefited from a delayed iPhone 12 launch and all segments faced an easier year-over-year comparison due to the March 2020 quarter being negatively impacted by COVID-19. On the services front, Apple now enjoys over 660 million paid subscribers to its various services, up 145 million from a year ago. Greater China sales were up 88% year over year, which we attribute primarily to the new 5G iPhone. Gross margin of 42.5% was up 270 basis points sequentially due to a strong product mix and favorable foreign exchange rates.

Management anticipates strong double-digit year over-year-growth for the June quarter, though the seasonal sequential decline from the March quarter will be greater than prior years. Meanwhile, supply constraints are expected to have a $3 billion-$4 billion negative impact on sales in the June quarter.

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