Apple 1st quarter results were out last week. Revenue of $88.3 billion topped consensus of $87.5 billion. IPhone revenue of $61.6 Billion surprised on higher average sales price, but was offset by weaker unit sales.
Other products generated $5.5 billion in revenue, better than expected driven by strong Apple Watch sales. The quarter had a week less which led to less sales in all other segments. However, an extra week in the 2nd quarter should make up for the deficit.
Gross margin of 38.4% and operating margin of 29.8% were in line with expectations. Earnings per share of $3.89 beat consensus of $3.85.
Q1 2018 results confirm that the evolution of the iPhone into a mature product is over. Market saturation in developed market is near its peak. However, this does not mean that Apple cannot generate additional revenue. Apple still can rely on a massive consumer base, unparalleled customer loyalty and the potential of increasing returns through satellite hardware and software products.
Additionally, following the recent retrenchment Apple shares appear attractive based on;
• The iPhone is reaching a saturation point in developed markets. Still the average selling price of the iPhone increase by 15% in the quarter ending December 2018. This demonstrates the health of the iPhone brand.
• Apple is well positioned to increase revenue on other products. Wearables were up 70% YoY for the second consecutive quarter. While Apple has rarely been the first out of the blocks with new products, Apple products have consistently disrupted and revolutionised the status quo. Our base assumption is that Apple will remain at the forefront of technological innovation.
• The new tax of 15% this year, repatriation of cash holdings and possible share buybacks are expected to boost earnings growth per share.
Maturity does carry its costs. Up to now the Apple brand has consistently represented the cutting edge of innovation. This has been constantly represented by the iPhone. However, outside the core customer base, there is increasing recognition that competition is fierce and probably the competition is ahead on many fronts.
In its latest iteration of the iPhone, Apple has included fast charging and improved its screens, both of which have been available to the competition for years. Apple makes up for this by designing its own chips and software, which are incredibly fast, and having a vast eco-system that incentivises loyalty.
The ability to maintain industry toping margins also helps the bottom line. However, for the longer-term Apple is still expected to produce its magic and come up with another lifestyle changing product. Apple has set the bar very high, and probably Apple’s most glaring weakness is the height of that bar.
While Apple is showing signs of maturity, Apple’s loyal customer base provides revenue stability. Additionally, investors should still be rewarded due to lower taxation, dividends and share buybacks. The recent pull back in prices provides a good base to add the share.
This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.