Apple Inc.: So Much For The iPhone Supercycle

AAPL stock - Apple Inc.:  So Much For The iPhone Supercycle

Source: Apple

Apple Inc.’s (NASDAQ:AAPL) earnings report was certainly awaited with trepidation from investors. And yes, it was justified. The fiscal first-quarter was fairly mixed. So far today, AAPL stock is off about 3.86%.

But keep in mind there had already been ample selling off. Over the past few weeks, AAPL stock has gone from $180 to $163. (And is now about $161).

So let’s take a look at the quarter. Earnings rose 16% to $3.89 a share, up from the Wall Street forecast of $3.86 per share. As for the top line, the revenues jumped by 13% to $88.3 billion, which beat the consensus of $87.28 billion.

But there were two big-time issues with the quarter for AAPL.

First there was the guidance. For the current quarter, the company expects revenues to range between $60 billion to $62 billion. However, analysts were looking for a more robust $65.73 billion. There was also disappointment with gross margins. AAPL predicts they will be 38% to 38.5%, below the Street’s 38.9%

Next, the company showed weakness with the iPhone. Note that units sales reached 77.3 million, down from 78 million in the year-ago quarter. Oh, and Wall Street was looking for 80 million.

But this should be no surprise. AAPL was late with the launch of the iPhone X. And besides, there weren’t as many must-have features to gin up demand, especially in light of the hefty $999 price tag.

AAPL Stock And The iPhone

AAPL has been working hard to expand its revenue base. The “Other Products” segment — which includes the Apple Watch, Apple TV and AirPods — posted an impressive 36% increase in revenues to $5.5 billion.

There was also strength in the services business — including the App store, Apple Pay and Apple Music — which saw revenues rise by 18% to $8.47 billion. So Apple is certainly having a lot of success monetizing its base of 1.3 billion phone users.

Yet the diversification efforts have not been without issues. Just look at the HomePod — Apple’s smart speaker. The company delayed its launch, which meant missing the all-important holiday season. The result was that rivals like, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL) have been able to capitalize on this massive opportunity.

Now despite all the diversification efforts, the fact remains that more than two-thirds of revenues come from the iPhone. So the sluggishness with unit volumes is definitely worrisome.

For the most part, the anticipated “upgrade supercycle” just never materialized.

Bottom Line On Apple Stock

Already analysts are getting cautious on AAPL stock. For example, KeyBanc Capital Markets’ Andy Hargreaves has noted: “Soft iPhone sell-through suggests a saturated market and the lack of gross margin upside reduces our view of potential profit growth.” His price target on Apple stock is $178 and he has lowered his rating from overweight to sector weight.

Now it’s true that AAPL has a massive cash hoard, which will likely mean more share buybacks and dividends increases. There may even be some interesting acquisitions.

What’s more, AAPL stock is at a reasonable valuation. Consider that the forward price-to-earnings ratio is at 13X. By comparison, Facebook Inc (NASDAQ:FB) is at 22X and GOOGL trades at 23X.

But again, the iPhone is what matters for AAPL stock. And for the most part, it looks like there will not be much momentum — which means that the shares may wind up languishing for awhile.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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