Apple – when a picture is worth a thousand words!

Okay, so we’ve got Apple’s Q2 results out tomorrow and expectations aren’t very ambitious (see Outlook in below Investment Summary).

It’s the big issue that is going to get the share price right however, and by this, whether we are looking at a re-run of Sony over two decades ago after Akio Morita stepped down. Apple under Tim Cook may be having to resort to IoS upgrades and “Error 35’s” to encourage the iPhone replacement cycle, but it’s still looking like a one-trick pony, waiting for the next big thing – not the Apple Watch or Beat, that we can be fairly sure of.

Markets may be maddening, but they are not stupid. If its not growing, why give it a growth rating? The below chart of Apple’s ‘GrowthRating’ along with its organic revenue growth versus its relative share price performance is all you really need to know. So amongst the endless research reports and meaningless PE multiples, remember the below chart, particularly if you concur that we may be looking at the start of an extended period of decline for the group.


Is that what they mean by convergence?

Is that what they mean by convergence?

Last comment update on: 2016-01-26

Q1 FY16 in line, but Q2 guidance negative – is AAPL now ex-growth?
Apple Inc: What’s the next big thing for Apple should the stalling growth in iPhone sales mark the peak in this product’s life cycle? Improvements to the Mac may be invigorating that product line, but its contribution remains relatively modest to the overall group, while the weak health of the global laptop market does not suggest this will be it. iPad sales continue to erode, so is it to be the Apple Watch or some of the expensively acquired peripheral brands such as ‘Beats’ that are going to revive the growth expectations? With Q2 guidance suggesting a constant fx revenue decline of perhaps -5% with a -400bps contraction in operating margins, the parallels with Sony after the Walkman and Akoi Morita are becoming increasingly relevant. In our own valuation matrix we have tried to reflect this in a forward growth rating target range of only +0-1.5% pa, albeit we might also be suffering from a dose of recency bias here as is not inconceivable that if the Apple Watch is an expensive turkey and the now well publicised iPhone production cutbacks herald a deeper than anticipated sales drop-off, then we may be facing a period of falling revenues, with all the implications to the prospective growth rating that would come with such an event.

Last Trading – Q1 FY16: Revenues +1.7%/+$1.3bn to $75.87bn (vs guidance of $75.5-77.5bn), GM +20bps to 40.1% (vs guidance of 39-40%), Operating income -0.3% to $24.17bn (vs approx. $23.9bn implied from guidance), tax at 25.3% (-90bps YoY and vs guidance of 26.2%), net income +2% to $18.36bn (vs approx. $17.9bn implied from guidance) and EPS +7.1% to $3.28 (vs guidance implied of approx. $3.15) on a -4.9% reduction in average shares. DPS meanwhile was increased by +10.6% to $0.52 with period end net cash (incl securities) of $153bn (vs end Q4 of $150bn and after $9.8bn of shareholder cash returns in the quarter). YoY Revenues (at =fx) include Americas -1%, Europe +18%, China +17%, Japan -4%, and other Asia +19%. By product, this included iPhone at +1% to $51.6bn (+0% units), iPad at -21% to $7.1bn (-25% units), Mac at -3% to $6.7bn (-4% units), Services at +26% to $6.1bn and ‘Other Products’ at +61% to $4.4bn. QoQ revenues include Americas +35%, Europe +70%, China +47%, Japan +22%, and other Asia +101%. By product, this included iPhone at +60% (+56% units), iPad at +66% (+63% units), Mac at -2% (-7% units), Services at +19% and ‘Other Products’ at +43%.

Co Guidance for Q2 FY16: Revenues of $50-53bn (-11% YoY vs $58.0bn), gross margin of 39-39.5% (vs 40.8%), Op Exp of $6.0-6.1bn (+12.5% vs $5.4bn), therefore implying EBIT of approx. $14.2bn = -22.5% vs $18.3bn), other income of $325m (vs $286m) and tax at 25.5% (vs 26.9%). This suggests an anticipated net income of approx. $10.8bn (-21% vs $13.6bn) and EPS of around $1.95 (-16.4%) on the reduced average
shares in issue (of approx. -4.9%).