Michael Kramer and the clients of Mott Capital own AAPL
With Apple’s Inc. (AAPL) stock doubling over the past 12 months, it would have been easy to say there was no way the company could live up to the massive expectations priced into the shares. Guess again. The company delivered blow-out fiscal first quarter 2020 results, easily beating estimates on both the top and bottom lines, driven by strong growth across iPhones, services, and wearables. If that wasn’t enough, the company’s guidance for the second quarter was just as impressive.
If the business trends continue, one could argue that the equity, even though trading at a historically high price-to-earnings ratio, is still cheap, with more room to rise in the future. The company’s strong results will force sell-side analysts to take up their earnings and revenue estimates for both 2020 and 2021. Which is likely to help pull that price-to-earnings multiple lower and drive the stock price higher.
Apple's price chart
Estimates Are Likely Too Low
Currently, consensus analysts’ estimates are forecasting earnings to grow by 10.3% in 2020 to $13.11 per share, with the growth rate accelerating to 14.8% in 2021 and earnings climbing to $15.05 per share. But those estimates are likely too low and will now need to be revised higher. Apple’s profits grew by 19% in the fiscal first quarter to $4.99 per share, which was almost 10% better than analysts’ estimates. Meanwhile, revenue increased by 9% to $91.8 billion, nearly 4% higher than estimates. The fiscal second-quarter guidance came in at $65 billion at the midpoint of the range, which was more than 4% higher than consensus estimates.
Apple earnings estimates
Currently, the stock trades for around 21 times 2021 earnings estimates, which is high on a historical basis for the stock. However, should earnings estimates begin to rise the earnings multiple should come down in the future unless the stock continues to increase at a rapid rate. Investors have been re-rating Apple’s stock as more attention is being given to the company’s rapidly growing services and wearable business and becoming a more significant piece of the pie.
Apple one-year forward P/E Ratio
Services and Wearables Grow
During the quarter, wearables grew by a stunning 37% to approximately $10 billion, while services increased by almost 17% to $12.7 billion. The two-business units now account for total revenue of nearly $23 billion, up by 20% from the same period a year ago. However, more importantly, the two business units now account for about 24.8% of Apple’s total revenue, which is up from around 21.5% of the total revenue in the same period a year earlier.
Data compiled using Apple's previous quarterly results
Revenue for Apple continues to be lumpy due to the seasonality around the iPhone business. However, the iPhone continues to shrink as a portion of the overall business. This quarter iPhone sales represented about 61% of total revenue, which is down slightly versus last year when it was at 61.7%, despite the company posting better iPhone sales this year.
Consistent Trends
Revenue growth for services has been consistent and trending in the 15-20% growth rate range since the fourth quarter of 2018, and at this point is showing no significant signs of deceleration. Meanwhile, iPhones sales showed their first positive quarter of growth since the fourth quarter of 2018. Wearable growth has remained consistent as well.
If the current trends for wearables and services continue, they should act as a major growth engine for the company. As a result, investors are likely to reward the shares with a higher earnings multiple and in turn, a higher stock price.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
