Apple FQ2 17– New normal

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These days, Apple looks like an industrial. 

  • Apple reported reasonable results and in increasing both the dividend and the share buy-back program, ushered itself squarely into a new normal of pedestrian growth.
  • FQ2 17A revenues / EPS were $52.9bn / $2.10 broadly in line with consensus at $52.9bn / $2.02.
  • Gross margins were 38.9% at the high end of the guided range and slightly above consensus at 38.7% as the iPhone 7+ was a stronger contributor to the mix than anticipated, lifting profitability.
  • Unit shipments were:
    • 50.8m iPhones vs 51.4m expected with an ASP of $655 compared to $666 expected.
    • Note that a higher than expected inventory adjustment (1.2m units) more than accounts for the difference.
    • 8.9m iPads and 4.2m Macs also shipped with Macs faring a little better than expected.
  • Services continued to be very strong with $7bn in revenue growing by 18% YoY with Apple stating that it now has a total of 165m paid subscriptions.
  • This includes Apple Music, iCloud and the subscription services of others that it offers on the Apple App Store.
  • There is obviously a degree of double counting going on here where for example, Spotify subscribers who pay through the App Store are also included here.
  • In my opinion, this renders this number virtually meaningless as Apple is counting subscriptions of its competitors as its own although it will still be making some money from these subscribers.
  • This combined with both an increase in dividend and the share buyback program, indicate very clearly that there is no growth in this company unless it can conquer a new segment.
  • Having (rightly, in my opinion) given up on making a car (see here), there is no new segment in sight, and so I see Apple, by and large, growing in line with the world economy.
  • I suspect that it will swing above and below that average as new products drive replacement cycles but the long-term outlook is industrial in its nature.
  • The next swing is likely to come from the iPhone 8 for which speculation and anticipation is already at fever pitch.
  • This means that Apple has to come up with something pretty special to see another cycle that will push its revenue growth above its new long term average, albeit temporarily.
  • Fortunately, the valuation of the company is not too demanding with a PER of 13.0x but the buy case based on valuation has now evaporated.
  • I see very little upside other than income coming from the shareholder return programs.
  • I would prefer Microsoft, Baidu and Tencent for those looking for capital appreciation.

 

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