Michael Kramer and the clients of Mott Capital own AAPL
Apple Inc. (AAPL) managed to report better than expected fiscal second-quarter results with revenue and earnings beating analysts' expectations. The results weren't terrific, but they seem to be good enough, and if they proved one thing, the company is beginning to show that its business can hold its own even when iPhone sales are weak.
The latest results do highlight that the stock does deserve to trade at a higher earnings multiple than it has in the past, as it becomes more of a consumer discretionary company, and moves away from being a cyclical hardware maker. It is one reason why the shares had such a big run-up in the second half of 2019. However, given the current stock valuation, an increase back to all-time highs seems unlikely at this point.
Fairly Valued
The equity already trades for approximately 19 times one-year forward earnings estimates of $14.81 and 17 times two-year forward earnings estimates of $16.50. These are both historically high levels for the stock. But over time, the shares should be able to continue to rise as future revenue and earnings push higher, led by the services and wearable units. But the advance is likely to be slower; then the one witnessed just six months ago as the business recovers from the economic recession caused by the coronavirus.
Apple one-year and two-year forward PE ratio
The Big Pivot
The quarter highlights how the company continues to diversify its business with strong growth from its services and wearable units. The service business saw its revenue climb by about 16.6% to $13.3 billion, and now it represents nearly 23% of the company's total revenue in the second quarter, the highest it has been on a percentage basis of the overall business. Additionally, the wearable unit grew revenue by 22.5% to almost $6.3 billion. Together the two business units saw revenue climb by 18.4% totaling revenue of $19.6 billion, accounting for about 30.6% of the companies total revenue.
Apple will need to rely on these two businesses to continue to drive long-term growth because iPhone sales have struggled in recent quarters. Overall, iPhone sales have only seen positive growth in 1 out of the last six quarters. That growth came in the fiscal first quarter of 2020. Seasonally, the fiscal third quarter is typically Apple's weakest quarter for iPhone sales, so the company will need to rely on services and wearables even more next quarter.
Technical Trading Zone
The technical chart shows that Apple has struggled to rise above resistance around a price of $295. Should the stock be able to rise above $295, the upside appears limited to around $305. At the same time, it has managed to find some meaningful support around the region of $260 and $265. It means that the stock is likely to be range-bound between $265 and $305 over the foreseeable future. However, should shares fall below a price of $260, it could trigger a much sharper decline perhaps to around $235.
Technical chart
Results Did Beat
In the fiscal second quarter, the company reported revenue of $58.3 billion, which was better than analysts' estimates of $54.64 billion. But to be fair, those estimates fell dramatically after the company pulled its second-quarter guidance in February. Additionally, the company reported earnings of $2.55 per share versus analysts estimates $2.25. Again earnings estimates had also declined sharply going into these results.
Apple's revenue and earnings estimates
Apple will need to continue to drive growth through its services and wearable business. Meanwhile, the company can try to lure the consumer into picking up the newest 5G iPhone if it is released later this year. However, in the middle of a recession, consumers may be less willing to spend on those new phones, then they were in the past.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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