AAPL, TWTR, BABA – Mixed Bag

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Apple in line, Twitter miss and Alibaba beat.

  • Apple reported a steady quarter while Twitter’s problems remain unresolved and Alibaba used mobile to defy the slowing Chinese economy.

Apple

  • Apple reported a steady quarter and set itself up for a good holiday quarter despite troubling rumblings from its supply chain.
  • Fiscal Q4 15A revenues / EPS were $51.5bn / $1.96, very slightly ahead of consensus at $51.0bn / $1.88.
  • 48m iPhones (48m consensus), 9.9m iPads (10m) and 5.7m Macs (5.6m) shipped and it was mainly the strength of iPhone ASPs revenues were able to beat expectations.
  • As a result of better prices, gross margins were also strong coming at 39.9% compared to consensus of 39.3% and guidance of 38.5% – 39.5%.
  • Apple Watch saw a sequential increase in shipments which leads me to think that shipments were around 3.8m units.
  • A sequential increase is good news as this sets a floor for volumes, but it is way below what the bulls were forecasting prior to the device’s launch.
  • China remained Apple’s strongest market with revenues doubling YoY, 25 stores and a healthy outlook.
  • Apple remains the only non-Chinese ecosystem to have any real traction in this market.
  • Guidance for fiscal Q1 16E was $75.5bn – $77.5bn with the midpoint at $76.5bn slightly below consensus at $77.0bn.
  • Competition has weakened over the last 2 quarters and so I think that Apple is very unlikely to miss expectations in January 2016.
  • However, I don’t think it will beat either meaning that the shares are unlikely to have a strong rally leaving Apple as a good place to park capital but not one that one would consider for outperformance.

Twitter

  • The gloss of Jack Dorsey’s appointment as CEO was well and truly tarnished by yet another quarter clearly showing that Twitter has ground to a halt.
  • Q3 15A revenues / adj-EPS was $569m / $0.10 ahead of consensus at $559m / $0.05 but the story remained user growth and guidance.
  • MaUs grew by 1% QoQ to 320m below consensus of 324m as it is clear that Twitter continues fail in moving away from just being a news dissemination system.
  • Twitter has adopted video in a similar manner to Facebook, but it has yet to see video drive a meaningful improvement in overall user engagement.
  • In order to begin growing once again, Twitter must break-out of its mould and begin addressing the other activities that users enjoy on smartphones and tablets.
  • Its segment represents just 16% of the time spent on a mobile device and consequently its ability to monetise is fundamentally limited.
  • This fact was inherent in Q4 15E guidance where revenues are expected to be $695m-$710m missing consensus of $741m by 5%.
  • The problem is that its current strategy remains to improve on what it has rather than to take the company in a bold new direction.
  • A bold new direction requires a dedicated, focused and highly engaged leader which Twitter simply does not have.
  • Instead Jack Dorsey has to spend a good portion of his time running Square and bringing this company to IPO.
  • Hence, I see no bold moves and suspect that the current strategy will deliver marginal improvements at best.
  • I see further disappointments ahead and think that the shares will continue to fall.

Alibaba

  • Alibaba reported good fiscal Q2 16A results as growth in transactions from mobile devices helped offset the overall drag from the slowing Chinese economy.
  • Q2 16A revenues / EPS were RMB22.1bn / RMB3.63 compared to consensus at RMB21.3bn / RMB3.45 triggering a small relief rally in the shares which have been pummelled by the broader sell-off in China.
  • Total transaction volume (GMV) was up 28% to RMB713bn ($112bn) and was mostly driven by the increase in user numbers which grew to 386m of which 346m were on mobile and responsible for 62% of GMV.
  • Cash flow from operations was RMB15.1bn (US$2.3bn) leaving the cash balance at a very healthy $16.7bn.
  • I believe that this is of paramount importance as the next stage of Alibaba’s growth is going to require meaningful investment.
  • Alibaba has built a strong base of mobile users and the next stage of its evolution is to expand the services that it offers to those users such that they increasingly engage with Alibaba.
  • It is from this increasing engagement that long term revenue growth is likely to be derived as the e-commerce business is now so large that it will be difficult to maintain the current rate of expansion.
  • This is where the O2O (online to offline) strategy (see here) and Digital Life services come into play, all of which Alibaba is aggressively expanding.
  • In this space Baidu, Tencent, Xiaomi and China Mobile are also all vying to take a leadership position.
  • The problem is that RFM estimates that the Chinese market is large enough for three to be very successful.
  • This means that two will fall by the wayside but with its current size and resources, Alibaba is unlikely to be one of them.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.