Apple will report June quarter results on Thursday, July 30th. The June quarter will be messy for all companies, including Apple, with revenue and earnings likely down around 10% y/y. While the numbers will be noisy—magnified by the fact that neither the company nor many of its peers provided guidance citing market uncertainty—we expect the June quarter results to instill confidence that the company will return to its growth curve next year. Investor confidence will be based on Apple’s strong cash position and commentary about upcoming products that tap into long-term undeniable growth movements (5G, digital health, working and learning from home, services, and autonomy).

While 2020 will remain unpredictable for all companies, we believe Apple’s cash position and product roadmap put shares of AAPL on a path to reach $500 and beyond in the years ahead.

Key June metrics:

• Cash: Apple ended the March 2020 quarter with $193B in total cash including $110B in debt, or $83B in net cash.  We expect total cash at the end of June 2020 to be $185B including of $110B in debt, or $75B 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 $83B 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 $57.2B in net income over the past four quarters and returned $90.4B in capital, or net $33.2B returned to shareholders over the year. 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 $49.5B (down 8% y/y) compared to the Street at $51.9B (down 4% y/y).
• Earnings: We expect EPS of $1.92 (down 12% y/y) compared to the Street at $2.02 (down 7% y/y).
• Guidance: When the company reported March quarter results they did not provide guidance. We don’t expect guidance for the Sept. 2020 quarter.
• iPhone: We expect iPhone revenue (42% of sales) to be down 20% y/y to $20.8B, below the Street’s $22.2B estimate (down 15% y/y). We believe the company will hint that its annual fall iPhone release is largely on track.
• Services: We expect Services (27% of sales) to be up 18% y/y to $13.5B, in line with 17% y/y growth last quarter. We are not clear on the consensus estimate for Services revenue; we believe investors are hoping for similar growth compared to the March quarter.
• Wearables: We expect wearables (10% of sales) to be up 15% y/y, compared to up 44% last quarter. Apple does not report this metric but frequently comments on the segment’s sales trajectory.
• Mac: We expect Mac revenue (9% of sales) to be down 20% y/y to $4.7B.
• iPad: We expect iPad revenue (9% of sales) to be down 15% y/y to $4.4B.

Some perspective on the June quarter

The June quarter falls within a once-in-a-lifetime event (we hope). Traditional metrics (sales, units, ASPs, gross margin) are less relevant given this historically different period. The June quarter is an opportunity to look for relevant information about Apple’s current strength, future prospects, and true intrinsic value.

In the past, we have referred to this period as the National Pandemic Adjustment Period, coined by St. Louis Federal Reserve President James Bullard. During this period we intentionally shut down major swathes of our national and global economy to achieve national health objectives. Similar to the March 2020 quarter, what occurred in the June quarter should be viewed as an aberration, both in positive and negative terms. To try and apply traditional norms, measures, and metrics is of limited value.

Tesla’s profitable June quarter and likely addition to the S&P 500 will be the central takeaway from its most recent earnings report—and a long-awaited acknowledgment from the investment community that Tesla will survive. That said, we believe the most important takeaway is that Tesla is following Amazon’s playbook: building a virtuous cycle of reinvesting profits to drive growth, scale, and innovation. Tesla’s valuation will likely have wild swings in the future and move higher over time, similar to Amazon’s trajectory.

Bad news for the auto industry

Musk commented during the earnings call that the company’s operating margin goal is to be slightly profitable and maximize market share. That means, similar to Amazon, they will pass the majority of upcoming cost savings from manufacturing efficiencies to consumers in the form of lower-priced vehicles. We expect it will continue to be difficult for other carmakers to build a vehicle that is feature and price competitive with Tesla. The company currently has about 80% EV share in the US, and it’s getting more difficult to imagine material changes to US market share in the next couple of years.

More than an auto company

While Energy Generation and Storage is only 6% of Tesla revenue, Musk surprisingly made several references on the earnings call to the importance of solar and batteries, reiterating the company’s mission to accelerate the world’s transition to sustainable energy. We see the company slowly adding energy as a central theme to the story, with details to follow at Tesla’s Battery Day event (currently scheduled for late September).  Similar to Amazon, we believe the long-term value of Tesla will not lie in its initial business; rather, the long-term value will include renewables, batteries, and repurposing those technologies into new markets, potentially HVAC, small aircraft, and others.

Tesla reports June quarter results on Wednesday, July 22.  The most important take away from the earnings results will likely be the company turning a slight profit and achieving positive free cash flow. This would pave the way for Tesla likely to be added to the S&P 500 within two months. We expect shares of TSLA to continue to see big swings in the months ahead but generally move higher as the company advances the future of EV’s, autonomy, and energy. Here’s what we’re looking for in the June quarter results:

Deliveries

The most important metric, deliveries, was already reported. The company delivered 90,700 vehicles in June, down 5% year-over-year (vs. 95,200 in Jun-19), compared to GM down 34%, Toyota down 35%, and Fiat Chrysler down 39%. During that time the Fremont factory (60% plus of overall production) was shut down for 33 days.

Profitability

While the Street is expecting a loss, most investors now believe the company will report a profit. We anticipate Tesla will report a profit based on the following 6 factors.

1. Regulatory tax credits. In Mar-20 the company sold $354m in EV credits, compared to $133m in the Dec-19 quarter. We believe given the Fiat Chrysler agreement to purchase additional credits, we expect between $200-$300m EV credit revenue in Jun-20.
2. FSD. The company added stop light and stop sign detection in June, which will allow them to recognize a portion of deferred full self-driving revenue. Beyond the revenue recognition, Tesla stoked FSD demand by lowering the upgrade cost of FSD for former buyers who opted out at the time of purchase and telegraphed an FSD upgrade price increase for those same customers on July 1st.
3. High margin Model Y trims. In March Tesla sold about 2k Model Y’s, going to about 15k in June. Most of these were higher margin performance and long-range battery configurations. This is a similar phenomenon reported in Sep-18 with high margin Model 3 trims. Additionally, in July Model Y got a $3,000 price reduction, which we read as evidence that Model Y manufacturing efficiencies are improving quickly.
4. Gigifactory Shanghai margins. In March we believe the company made about 15k units in China and that increased to about 30k in the June quarter. An increase in Shanghai production should lay the groundwork for better margins in China.
5. Pandemic cost-cutting. These changes were announced earlier in the year, and it’s unclear when the timing of the cost reductions will impact the bottom line.
6. Panasonic battery renegotiation. At the start of the June quarter, Tesla renegotiated its supplier agreement for Panasonic 2170 battery cells. We don’t have a line of slight into the exact timing of the likely price break and believe it could have already started in the June quarter.