Apple December Earnings Preview

Apple December Earnings Preview

Apple will report December quarter results on Wednesday, January 27th. We expect the December quarter to exceed Street estimates, highlighted with revenue growth of 19% y/y compared to the Street at 12%. While the numbers will have some noise—given the shift in timing of the fall iPhone launch from September into December—we expect results will continue to instill confidence that the company will grow revenue around 16% in FY21, compared to 6% in FY20. The accelerating digital transformation will likely continue to be a tailwind for Apple’s revenue growth for the next several years.

Expecting a step forward

We believe the December quarter results will be a step toward our prediction that AAPL will be the top performing FAANG stock this year, based on four factors:

  • The accelerating digital transformation means more people are working and learning from home, providing a continued tailwind for the iPad and Mac businesses (about 25% of total revenue). We believe these two segments can grow at 10% plus in 2021 and 2022, compared to flat growth over the last few years.
  • 5G enthusiasm will grow in the back half of the year, starting a two to three-year iPhone upgrade cycle.
  • While Street FY21 revenue growth estimates of ~15% are in line with our 16% expectation, we believe consensus estimates for FY22 of 5% y/y revenue growth are too low. We expect those estimates to inch higher throughout FY21. Ultimately, we believe FY22 revenue growth will be closer to 10%.
  • Growing anticipation of new business segments that likely won’t launch until 2022 at the earliest. We expect hardware subscription offerings that build toward a 360° bundle, along with growing optimism around a massive expansion in the company’s addressable market with Apple Car.

Putting it together, we believe shares of AAPL will approach $200 (44% upside from current levels) over the next couple years, based on 35x our 2022 EPS estimate of $5.70.

Key December metrics:

  • Cash: Apple ended the September quarter with $192B in total cash including $112B in debt, or $79B in net cash.  We expect total cash at the end of December 2020 to be $185B including of $112B in debt, or $73B in net cash. The topic of Apple’s cash position is more complex than its cash balance. Apple has outlined a goal to be net cash neutral over time, suggesting that total cash will eventually equal debt.  This is good news for investors—they can expect in the years ahead an additional estimated $73B in cash will be returned through buybacks and dividends, or otherwise strategically deployed. Some of that cash has already been committed to investors through the company’s capital return program. The challenge is that the company is generating so much net income that the road to net cash neutral is long and slow. Apple has generated $57.4B in net income over the past four quarters and returned $90.2B in capital in a most tumultuous of years. At this pace, it will take the company two to three years to be net cash neutral. In the end, Apple has a good problem when it comes to cash—a gravy train of cash returning to investors, which is not fully appreciated.
  • Revenue: We expect revenue of $109.5B (up 19% y/y) compared to the Street at $102.8B (up 12% y/y).
  • Earnings: We expect EPS of $1.42 (up 13% y/y) compared to the Street at $1.40 (up 12% y/y).
  • Guidance: When the company reported March 2020 quarter results they stopped providing guidance. We don’t expect guidance for the March 2021 quarter.
  • iPhone: The December iPhone results will benefit from the timing of the latest iPhone release. We expect iPhone revenue to jump to 59% of sales (typically around 50% of sales) and be up 16% y/y to $64.9B, above the Street’s $59.4B estimate (up 6% y/y). We are well ahead of the Street on iPhone for December, given our believe that nearly $8B in iPhone revenue was pushed from the September quarter given the timing of the fall iPhone release. As a point of comparison, we believe the Street expects about $4B in revenue to have moved from September to December.
  • Services: We expect Services (14% of sales) to be up 18% y/y to $15.0B, up from 16% y/y growth in the September quarter. We are not clear on the consensus estimate for Services revenue; we believe investors are expecting a similar 18% growth.
  • Wearables: We expect wearables (10% of sales) to be up 17% y/y, compared to up 24% last quarter.  We believe this segment has lagged, given Apple Watch is viewed by consumers as non-essential compared to iPhone, Mac and iPad. Adding to the Watch sales headwind has been limited capacity at Apple Stores, where many first-time Watch buyers shop. Apple does not report this metric, but frequently comments on the segment’s sales trajectory.
  • Mac: We expect Mac revenue (10% of sales) to be up 40% y/y to a staggering $10.0B.  We believe the Street is expecting 32% growth. The refreshed Mac lineup with the new M1 chip, along with the work and learn from anywhere trend has boosted the segment’s sales.
  • iPad: We expect iPad revenue (8% of sales) to be up 35% y/y to $8.0B. We believe the Street is expecting 23% growth.