Apple Earnings Show Slowdown, But Don't Sell Your Shares Yet

  • Apple reported Q1 2016 results, reiterating analysts' concerns of declining growth.
  • iPhone continues to generate most of the company’s revenues while Apple fails to launch a new major blockbuster to replace it.
  • I believe Apple will improve in the second half of 2016, and the stock price will rebound.
  • Even though the near future might seem bleak, investors should not rush to sell Apple out of fear, but hold onto it for now.

The tech titan Apple (NASDAQ:AAPL) reported its Q1 2016 earnings yesterday with mixed results and reaffirmed some of the market concerns about a possible slowdown in Apple sales. Even though Apple reported a higher than expected EPS, the company slightly missed its revenues consensus estimate and provided a disappointing guidance that triggered a 2.7% after-hours plunge in stock price. Going into the earnings, Apple tried to dismiss analysts’ estimations for declining sales and eroding growth rates; however, these concerns were partially verified when Apple provided a soft guidance for the second quarter of the year, coming below the street’s expectations for total sales.

Apple Revenue Segments Break-Up

Segment information provided very little surprises in sales trends of the different product lines, as iPhone growth slowed down, iPad Pro could not halt the iPad sales slump, Mac sales continue to stagnate, and Apple Watch sales continue to grow in insignificant volume to impact the Apple’s top-line as shown in the chart below.

AAPL_chart 11_012716

Apple's iPhone Sales Dip

The iPhone segment remained the company’s cash cow and generated 68% of the total revenues in Q1. This is why the economic slowdown in China, which impacted iPhone sales has had a direct effect on the company’s stock performance. Apple sold 74.8M units of iPhone worldwide, which is below analysts’ expectations of 75.46M units. However, the revenue from iPhone sales was near expectations, due to a higher ASP than expected, with $691 vs. consensus of $680. CFO Luca Maestri mentioned that for-ex had a significant impact on iPhone’s ASP in Q1, pressuring it down from $740 to $691. In the rest of 2016, for-ex is expected to play a substantial role in the company’s reports, as global currencies fluctuate sharply against the U.S. Dollar.

iPad Sales Continue To Disappoint

The iPad segment continued to disappoint with a 25% YoY plunge in unit sales, even with the new iPad Pro launch. Many enterprise-focused partnerships could not turnaround this declining segment. The Mac segment did not provide any significant news since it continues to revolve around 5M units and $6.5B revenues.

The highest growing segments were the services segment, which includes Apple Pay, App Store, Apple Music, and AppleCare, and the other products segment, which includes the Apple Watch, iPod, Apple TV, Beats, and other accessories. The services segment increased by 26% YoY to $6B, and the other product's segment increased by 62% YoY to $4.4B. Together, these two segments generated around $10.5B in Q1 and accounted for 8% of the Apple’s revenues. As shown in the chart below, services and other products constantly increased for a few years with higher growth rates than the traditional product lines (iPhone, iPad, and Mac). These segments incorporated some of Apple’s emerging businesses, like the Apple Watch, Apple Pay, and Apple Music.

AAPL_chart 10_012716

Could these initiatives drive Apple’s future growth? Probably not, and this is the big concern analysts have about Apple – there is no major blockbuster to replace the iPhone as the company’s cash machine. The Apple Car might be that blockbuster, but it is still years away and has no effect on the company’s financials right now, or in the near future. It seems that Apple is going into a transition, triggered by the slowdown in smartphone market growth and declining device unit sales. Until Apple presents a new device or significant revenues from its services and other products segments, it will have a very difficult time in the market.

Looking forward to 2016, I’m cautiously optimistic and believe that Apple will stagnate, but continue to grow, maybe at a slower pace than we witnessed before, but still grow. CEO Tim Cook mentioned that only 40% of the iPhone customer base upgraded to the 6/6S product line while the rest remain with older generation phones. Assuming that iPhone 7 and iPhone 5se/6c will generate the same level of revenues as the previous generations, this means that other customers will upgrade to the lowered price iPhone 6/6S, which will drive the ASP mix significantly higher, potentially offsetting most of the volume and for-ex headwinds. Also, Mr. Cook dismissed most of the concerns about China and mentioned he is still bullish on China and believes that the continuous 4G penetration will drive more sales there.

Apple ended Q2 2016 with the incredible amount of $216B in cash, which ignited investors’ imaginations about an acquisition(s) of Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), GoPro (NASDAQ:GPRO), Fitbit Inc (NYSE:FIT), Box (NYSE:BOX), Paypal Holdings (NASDAQ:PYPL), etc. I’m not aware of any talks at the moment, but a high-profile acquisition might be the catalyst to drive Apple’s growth in the future. Every one of the examples I gave above could help Apple penetrate and dominate a different market that Apple either struggled to penetrate or plans to in a few years. In the meantime, Apple acquires more of Apple with a share buyback program.

I believe that the current slowdown in Apple’s growth rate is temporary, and the company will continue to grow significantly in the second half of 2016, after a challenging Q2 (according to CFO Maestri). Apple's stock price that shed more than 20% of its value in the recent weeks will rise. For now, Apple stock is a hold and investors would do well not rush to sell the stock out of fear.

Lior Ronen Lior Ronen   on Amigobulls :
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