Apple Preview: Comfort for Long-Term Investors
First things first. We’re reminded that analyzing the impact of the pandemic on commerce misses a global truth. The true cost is those directly affected by losing loved ones and to a far lesser extent the disruption around our lives.
Bottom Line on March
Apple will report March quarter results on Thursday, April 30th. The March and June quarters will be messy for all companies, including Apple. While the numbers are noisy, we expect investors will leave the March results with greater comfort that the company will be a return to its growth curve next year based on its cash position and commentary about upcoming products. We believe this will lay the foundation for shares of AAPL to continue to reach new highs in the years to come.
Key March Metrics:
- Cash. Apple ended last quarter with $99B in net cash with a goal of reaching net cash neutral at some point in the future. We expect net cash to end closer to $90B, and total cash excluding debt ending at $190B.
- Changes to capital return program. We believe Apple will maintain its current buyback and dividend program. Some analysts are expecting the company to increase share repurchase by $75B, in line with what the company added last year. We see this as less likely. If Apple does add to the program, it should be viewed as an unprecedented sign of strength.
- Revenue. We expect $51.1B (down 12% y/y) compared to the Street at $54.8B.
- Earnings. We expect $2.00 EPS (down 19% y/y) compared to the Street at $2.29.
- Guidance. We believe Apple will give guidance, with a 15% revenue range, greater than its typical ~6% range. That said, the company may fall in line with others and suspend guidance.
- iPhone. We expect iPhone revenue (46% of sales) will be down 25% year over year, to $23.3B. This is below the Street’s $28.4 estimate.
- Services. We expect Services (26% of sales) to be up 17% year over year, this compares to up 15% in Dec-19. We are unclear on the consensus Service estimate and believe investors are hoping for an acceleration in revenue growth from Dec-19.
- Wearables. We expect wearables (8% of sales) to be up 24% year over year, compared to up 44% in Dec-19. Apple does not report this metric but frequently comments on the segment’s sales trajectory.
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The Quarter in Perspective
The March quarter is a once in a lifetime event (we hope). Traditional micro metrics (sales, units, ASPs , gross margin) are less relevant given this historically different period. The quarter is an opportunity to look for relevant information about Apple’s current strength, future prospects, and true intrinsic value.
Let’s call this period the National Pandemic Adjustment Period, coined by St. Louis Federal Reserve President James Bullard. It’s the period where we intentionally shut down major swathes of our national and global economy to achieve national health objectives.
In Asia this began in January, spreading slowly until virtually the entire world was or is under some type of lockdown and resulting slowdown today. Though there are some gentle signs of reopening, they are widespread in certain sectors of our national and global economies.
What occurred in Mar-20 should be viewed as an aberration, both in positive and negative terms. To try and apply traditional norms, measures, and metrics is of limited value.
Can Financial Strength be Gleaned from March Results?
First, an update about the most important metric at the moment, the company’s balance sheet strength and ability to generate cash. At the end of Dec-18, Apple had net cash of $99B and about $200B in total cash. For March we believe net cash will be down slightly given the decline in revenue along with making progress towards the company’s goal of achieving net cash neutral.
Financial strength is a key indicator as to how the firm will navigate the path out of this difficult period to the destination of the new normal on the other side once the pandemic has passed. A destination that will favor the companies who can capitalize on opportunities as the new competitive landscape is likely to be less competitive, as those who remain are more likely to be impaired.
How Strong Was Apple Coming into the Crisis Period?
The company was firing on all cylinders, reporting record earnings three months ago ( January 28th). Apple’s current and future products will capitalize on truths about where the world is going including 5G, wearables, services, wellness, streaming, all growing nicely. Additionally, the company’s balance sheet, leadership, customer loyalty all set the global bar for excellence.
Apple Weathering the Storm
The pandemic has called into question the near and mid-term health of airlines, hotels, cruise lines, restaurants, and live sports. For Apple, while regrettable, this period has amplified the company’s strengths and leadership position in tech and more broadly in society navigating the pandemic.
Apple’s products are indispensable in keeping people connected at work and with friends as we shelter at home. Telemedicine, Facetime, streaming, contactless payments, remote health monitoring, and distance learning are all global trends accelerated during this period with Apple’s support today and in the years ahead.
The Months Ahead Should Favor Apple
Apple entered the pandemic strong, and the company’s products are even more a foundation of our lives compared to last year. The months ahead will have many unknows and while humans can influence events, we can’t control them, so we’ll just have to see how events unfold which takes us to guidance.
Like most companies, Apple’s guidance will also be atypical. We expect a broad revenue range, potentially 15%, compared to the companies’ typical revenue guidance range of around 6%. There is also a chance the company does not give any guidance. Any approach is acceptable given this quarter will bear the brunt of the intentional economic shutdown. Virtually all concurrent economic indicators will be catastrophically bad, perhaps exceeding those experienced at the height of the Depression. GDP, unemployment, and retail sales are all already under significant strain and are likely to worsen. In this historically difficult period, Apple will not be immune. It should be expected that Apple’s Jun-20 quarter will be significantly lower than the Mar-20 in terms of revenue and earnings and viewed as an aberration. For June we’re expecting revenue of $46B, compared to $51B in March.
Sep-20 will likely be a transition quarter as the economy comes back online. Economic growth and vitality should be expected to quicken through the September quarter as the unprecedented fiscal and monetary support globally begins to take. We expect by Mar-21 growth will have returned.