AAPL Preview: Another Step Toward a Proper Tech Multiple

AAPL Preview: Another Step Toward a Proper Tech Multiple

  • Apple reports Tuesday, January 28th. We expect the takeaways to be that the iPhone business has stabilized and strength in Services and wearables continues (which combined will approach 30% of revenue in FY20). The guidance for Mar-20 will likely leave investors with increased confidence that overall revenue growth in FY20 will meet Street expectations, rebounding to 4-6% growth, compared to down 2% in FY19. The easier comps this year give us confidence overall growth will finish at the high end of the 4-6% range.
  • We expect an active installed base of 1.5B plus devices, up 8% year over year. The last time Apple updated the metric was in Jun-19 at 1.4B devices.
  • The underlying theme for FY20 will be marking time to iPhone 5G, which we expect to be announced in the fall. While 5G will emerge as a measurable positive for Apple shares, it’s only part of Apple’s long-term story, which deserves a higher multiple inline with other large tech companies.
  • We continue to believe Apple will be the top-performing FANNG stock in 2020. We expect AAPL’s earnings multiple to increase in 2020 as investors increasingly recognize Apple’s combination of hardware and services as a high-visibility and sticky business. While AAPL has made progress towards a proper tech multiple over the past year, a gap remains. To illustrate, applying Google’s forward earnings multiple to Apple’s next 12 months earnings yields a $400 AAPL share price today.

High Level on Dec-19 & Guidance

  • For Dec-19, we expect revenue and earnings slightly ahead of the consensus of $88.3B and GAAP EPS of $4.53, implying revenue up 5%, compared to up 1.8% in Sep-19 and up 1.0% in Jun-19.
  • Dec-19 will be representative of what to expect in FY20 – the overall business growing at 4-6%, comprised of iPhone revenue up 1%, Services up 15%, and wearables up close to 50%.
  • For guidance, we expect the high end of the Mar-20 revenue outlook to be in line with the Street’s $62.3B estimate. We would view this as an inline guide, given Apple typically comes in at the high end of its guidance range. We expect gross margin guidance between 37.5% and 38.5%, setting up for the 16th consecutive quarter of essentially 38% gross margin.

Product Lines

  • Dec-19 will mark a stabilization in the iPhone business after being down in each of the previous four quarters (down 14% in FY19). The stabilization is attributed to the average 3.25-year iPhone upgrade cadence that translates into an FY20 revenue tailwind.
  • Apple is slowly diversifying away from the iPhone, likely accounting for 58% of revenue in Dec-19, down from 62% in Dec-18 and 69% in Dec-17. For FY20 we expect iPhone will be 52% of revenue, down from 55% in FY19 and 62% in FY18.
  • We believe iPhone 5G will take a year to gain traction and will drive a step-up in iPhone revenue as a percentage of sales starting in FY22 through FY24.
  • In Dec-19, Apple needs to grow Services at 16-18%, which would be consistent with the Sep-19 growth of 18% and overall FY19 growth of 16%. Our confidence in this range comes from Apple’s comments related to App Store revenue in this most recent holiday period.
  • We believe, in the past three years, Services growth has outpaced iPhone unit growth by an average of 28%, confirmation that Services growth is benefiting from Apple’s existing users increasing their spend within the Apple ecosystem as well as the company acquiring new Services customers through secondary iPhone sales.
  • Products margin will likely continue its slight declining trend, ending at 33.5% in Dec-19 compared to 34.4% in Dec-18. For Services, we expect a year over year margin increase to 64.5% up from 62.8% in Dec-18. Putting it together, the decrease in Products margin (82% of revenue) is offset by the increase in Services margin (18% of revenue).

Open Questions

  • How to think about Wearables growth in FY20. We estimate the segment’s growth in the Sep-19 quarter was 65% (company reported “greater than 50% growth”), up from 51% in Sep-18 (company also reported “greater than 50% growth”) driven by both AirPods and Apple Watch.
  • Lingering China trade concerns.
  • Thoughts on the 5G rollout. We see the 5G rollout for Apple as one step back, three steps forward.
  • Apple’s privacy-first approach shelters them from most headline risk around consumer data practices, but investors will want to gain a more informed view on how the company would respond to greater government oversight on tech.
  • As for the timing of achieving net cash neutral, the company has not disclosed a timeframe to date.