iPhone Road to Recovery Continues Boosted by Wearables and Services

iPhone Road to Recovery Continues Boosted by Wearables and Services

Apple reported September results slightly ahead of expectations and effectively guided Dec-19 revenue 2% above the Street. These results continue to be impressive for the second straight quarter, given the company’s China, macroeconomic, and competitive headwinds.

Similar to last quarter, we were given more evidence that Apple’s ecosystem has a steadying effect on the overall business. We continue to believe that recent results and the roadmap for the next two years will prove to be a turning point for investors to begin valuing Apple with a more appropriate multiple. While shares are up 16% in the last three months, we don’t feel that the true value of Apple’s ecosystem is being accounted for by investors.

  • Overall iPhone revenue was down 9% in Sep-19. It will likely be flat in Dec-19 and up a few percentage points in Mar-20.
  • We estimate Services and Wearables accounted for 28% of sales and grew at 29% y/y vs. overall revenue growth of 2%.
  • Most encouraging is that the Services and Wearables segments remain in their infancy, evidenced by new services like Apple TV+ and Tim Cook’s mention that 3/4 Watch buyers are new to the product.
  • Putting the Apple Watch opportunity into context, we estimate the active installed base of Watches is about 65m vs the iPhone installed base of about 915m. This roughly implies a 7% penetration of the Apple Watch’s addressable market.
  • Wearables growth accelerated, likely to 55% y/y vs. 50% in each of the past two quarters.
  • Despite iPhone units likely down close to 10% y/y, Apple grew its base of active iPhones slightly to what we estimate to be 915m.
  • Net cash is now at $98B, and the company reiterated their intent to move toward net cash natural “over time,” which gives us further confidence that the capital return program will be expanded on the March earnings report.
  • Greater China represented about 17% of revenue in Sep-19, similar to last quarter. This shows the company is effectively navigating the China trade dispute.