Apple’s (NASDAQ:AAPL) first-quarter results rose meaningfully year-over-year and beat analysts’ estimates, causing Apple stock to rise slightly. But I think it’s important to note that the company’s top line barely increased versus the first quarter of fiscal 2018. The company reported that quarter two years ago, in January 2018.
Even more alarmingly, the hardware giant’s operating income — which is basically its profit excluding the impact of tax cuts and share buybacks — was actually slightly lower last quarter than in the same period two years earlier.
In its fiscal first quarter of 2018, reported in January 2018, Apple’s net sales came in at $88.3 billion. Yesterday it reported net sales for Q1 2020 of $91.8 billion. That’s an increase of about 4% over two years. Since the beginning of 2018, Apple stock has surged more than 90%.
Meanwhile, Apple’s operating income in 2018’s Q1 was $26.3 billion. Its operating income last quarter was $25.6 billion. The company’s operating income fell 2.7%.
By the Numbers
Apple’s net income rose to $22.2 billion last quarter versus $20.1 billion during the same period two years earlier. But that increase was largely due to a lower tax bill. It paid almost $7 billion of income tax in Q1 of FY18 and just $3.7 billion of income tax for Q1 of FY20.
Finally, Apple’s earnings per share was $4.99 last quarter, up from $3.89 during the same period two years earlier. In addition to the income tax cut, Apple’s EPS last quarter was boosted by a much lower share count in FY20, driven by the company’s ongoing, large share buybacks.
Also importantly, Apple’s iPhone revenue last quarter came in at $55.9 billion, 9% lower than the $61.6 billion of revenue that the device generated in Q1 of FY18.
How I Think About Apple
I believe that Apple is, of course, one of the most successful companies of all time. But the two-year comparison shows that it’s wrong on many levels to call Apple’s Q1 results a blowout. In fact, in the bigger picture, its flagship iPhone is still at best stagnant and at worst contracting. As a result, the company is having some trouble growing meaningfully.
To its credit, Apple has taken multiple steps to try to correct this problem. It’s lowered the prices of iPhones and tried to sell more services and wearables, especially AirPods. And these initiatives have been somewhat successful. Specifically, its iPhone sales rose by about $4 billion year-over-year and its services revenue increased by nearly $2 billion. The company’s Wearables, Home and Accessories unit saw sales increase $2.7 billion.
Consequently, its overall business results have more or less returned to FY18 levels.
But obviously, these efforts, particularly when it comes to services, have not been as successful as most Apple bulls had anticipated. For years, many of them had already anointed services as the company’s savior. But the unit’s revenue rose less than $2 billion year-over-year last quarter. That indicates that services alone is not going to cause Apple’s growth to meaningfully accelerate.
Moreover, discouragingly for Apple and Apple bulls, the unit’s sales rose about 17%, down from 18% growth during the same period a year earlier. The Wearables, Home and Accessories unit is more promising, but the novelty of AirPods could soon wear off, causing that unit’s growth to drop meaningfully.
Moreover, the company remains heavily dependent on the stagnating iPhone. If, during the next holiday-season quarter, the device’s sales drop 10% year-over-year and the sales of the company’s two high-growth businesses expand by the same amount (in dollars) as they did last quarter, the company’s overall revenue will fall.
The Bottom Line on Apple Stock
The profits generated by the company’s businesses last quarter were lower than they were two years before, yet the shares have jumped more than 90% in the last two years.
Previously, some had said that AAPL deserves a higher multiple because software was becoming a major part of its business. But that forecast has obviously not materialized.
Now Apple stock bulls are justifying the high share price by predicting that 5G will cause iPhone sales to jump. But, as I pointed out in a previous column, Atlantic Equities analyst James Cordwell said that “the extent to which 5G will ignite consumer demand is far from clear, particularly in the early stages of the technology’s rollout.” He thinks that the potential of 5G was more than priced into the shares, even before their latest rally.
Apple stock seems disconnected from all of the facts I outlined in this column, making the shares seem more and more like a bubble. While the shares could indeed rise further after 5G, holding into Apple stock at this point seems like a dangerous bet.
As of this writing, Larry Ramer did not own shares of any of the companies mentioned above.