August 5, 2019 BARRON’S 17
TechTrader
With Apple’s Risks Rising, Why Are Investors So Bullish?
ByTaeKim
APPLE BULLS SWOONED LAST WEEK OVER THE COMPANY’S
better-than-expected reported earnings. All it took
wasareturntorevenuegrowthaftertwoquartersof
declines.Thedefinitionofsuccesshaschangedforthe
iPhone maker, which spent a decade growing sales
more than 20% a year on average.
Areturntosalesgrowthinthelatestquarterwas
animportantinflectionpointforApple(ticker:AAPL),butthenegativ-
ity could return as investors dig into the underlying realities.
On Tuesday, Apple reported June-quarter revenue of $53.8 billion,
up1%yearoveryearandabovetheconsensusforecastof$53.3billion.
Earningspersharewere$2.18,downfrom$2.34theprior
yearbuthigherthanthe$2.09averageanalystestimate.
Thesharesrose2%thefollowingday,withmultipleana-
lysts raising their Apple stock price targets.
Theupsidecamefromsurprisingareas.Salesfromthe
Mac business beat Wall Street’s estimate by about $
million,whiletheWearables,Home,andAccessoriesopera-
tion crushed estimates by $700 million. That segment
includes the Apple Watch and AirPods. While the tech
giant doesn’t disclose sales in the segment, Cook did say
lastweekthatwearablesgrew“wellover50%”inthequarter.AirPods
salesprobablybenefitedfromarevisedversionreleasedinlateMarch.
Butinvestorsshouldbecareful inevaluatingtheshiftingnarrative.
The long-term driver of Apple shares has been excitement about the
company’sservicesbusinesses.Thestockmoveisclearonthat:Apple
isupnearly30%thisyear,evenasiPhonesaleshavedeclinedmarkedly.
Thestocknowtradesat16.4timesprojectedearningsforthenext
12months,wellaboveitsfive-yearaverageof13.7andnearafive-year
peak of 17.7. Investors have been paying up for the stock on the idea
thatAppleismovingawayfromitshardwarefocustowardamorepre-
dictable services- and software-driven model.
The problem is that Apple’s services business remains a question
mark and could still disappoint. The segment actually missed analyst
estimates by $200 million in the June quarter, with sales up 13% year
over year, versus 16% in the prior quarter.
Moreover, KeyBanc Capital Markets Andy Hargreaves expects
Apple’s services growth rate to subside over the next year. “Services
businessistiedtogrowthintheuserbase,”hesays.“Andtheuserbase
is definitely decelerating.”
The dynamic puts even more pressure on Apple’s next wave of
services, expected to be launched by the end of the year, including
Apple TV+ (video subscription), Apple Arcade (gaming subscription),
and Apple Card (credit card). In each area, Apple is joining a crowded
field. “What Apple is offering is not going to be better than what’s in
the market,” Hargreaves says.
Amid the excitement about wearables, iPhone sales came in below
expectationsforthequarter.TheiPhone’srevenueof$26billionmissed
theStreetconsensusby$300million,withsalesdown12%yearoveryear.
IPhoneunitsales,whichApplenolongerdiscloses,mightlookevenworse.
IDCestimatesthatiPhoneunitshipmentsweredown18%yearoveryear
inthequarter,theworstshowingamongthetopfiveglobalsmartphone
makers. Apple didn’t respond to a request for comment on IDC’s data.
“ThecorecontroversyofnormalizediPhonegrowthremainsunre-
solved,”BernsteinanalystToniSacconaghiwroteonWednesday.“We
remindinvestorsthatiPhonesarestilldown,[and]bigquestionsabout
replacement cycles [are] still outstanding.”
Apple’snewiPhonelineup,duethisfall,isunlikelytochangethestory
significantly. “This [coming] cycle, I believe, will be chal-
lenging,asIamnotexpectingdramaticallynewdesigns,”
Patrick Moorhead, principal analyst at Moor Insights &
Strategy, wrote in an email.
And then there’s trade. Apple is arguably more
exposed to China than any other large U.S. tech firm.
On the recent earnings call, CEO Tim Cook down-
playedreportsthatthecompanyis movingproductionout
of China, where it largely manufactures its products, to
avoidpotentialtariffs.“Therehasbeenalotofspeculationaroundthe
topic,” he said. “I wouldn’t put a lot of stock into those.”
Apple is clearly worried about tariffs, however. In June, it sent a
letter to U.S. Trade Representative Robert Lighthizer, noting that the
next round of proposed tariffs would hurt it because it would cover all
of Apple’s major products, including the iPhone, iPad, Mac, and Air-
Pods. “We urge the U.S. government not to impose tariffs on these
products,” Apple wrote. “U.S. tariffs would also weigh on Apple’s
global competitiveness.”
Theletterwasn’tconvincingenough.OnThursday,PresidentDonald
Trumpannouncedplanstoimposea10%tariffonSept.1covering$
billion in imports from China—including Apple’s key products. Investor
reactionwasswift;Applecloseddown2%onThursdayandanother2%
on Friday, to $204.02.
Whilethelatesttariffsmayjustbeanegotiatingtactic,anypossibil-
ity of trade levies doesn’t seem reflected in Apple stock.
So where do Apple shares go from here?
In early January, a few days after the company had issued a sales
warningandwithitsstockreeling,wesaidthepessimismhadgonetoo
far, arguing that the shares could rise 30%, to $194. The bullish call
proved correct, with the stock hitting that mark in March.
From there, we warned that the stock’s 2019 gains could fade as
investors returned their focus on the declining iPhone sales. Our view
hasn’t changed. Apple is richly priced, just as conditions seem to be
deteriorating.
email: [email protected]
Appleisrichlypriced,
despitemounting
challengesforthe
iPhoneandotherparts
ofthebusiness.