Apple FQ1 19 – Nice but dull.

Apple is looking like a safe haven once again.

• Hardware is by far the most efficient method of digital ecosystem monetisation but at the same time, it is also the riskiest, meaning that when it goes wrong, it really hurts.
• Furthermore, Apple’s hardware is so profitable that it will find it virtually impossible to replace hardware profits with services, leading to the likelihood very low if any growth over the next 12-18 months
• Apple reported FQ1 19 results in line with reduced expectations and guided weakly, but did a good job of reassuring investors that there is life after hardware.
• FQ1 19 revenues and EPS were $84.3bn / $4.18 which was just ahead of reduced consensus at $84.0bn / $4.17.
• While iPhone revenue fell by 15% YoY, services growth of 19% YoY, Mac sales growth of 9% YoY and iPad sales growth of 17% YoY mitigated the decline to just 3.4% YoY company-wide.
• Even in its weakened state, iPhone still accounts for 63% of Apple’s revenues meaning that if the weakness continues, there will be more misses ahead.
• However, I do not believe that this is the case.
• The cause of the problem here was Apple’s misjudgment of consumer’s willingness to pay increasingly high prices for smartphones that have caused users to hold onto their phones for longer.
• This will create a temporary decline in shipments while YoY comparisons are made to periods where the cycle was shorter and then it will stabilise.
• Consequently, I think that 2019 will be a year of offsetting where the services business helps offset the declines in iPhone revenues which should then stabilise in FQ1 2020.
• This does not mean the end for Apple nor is there a credible challenger in sight as Google remains unwilling or unable to lick the Android user experience into shape from where it could really compete.
• Against that backdrop, Apple is likely to chug along with a strong position in the premium segment with little competition.
• The net result will be a year that is dull and devoid of fireworks which might be exactly the right thing to hold when thinking of what may befall Facebook, Tencent, and Alibaba this year.
• Apple is considerably cheaper than it was a few months ago, qualifying it once again as a safe haven status.