Apple (AAPL 206.42, -15.80, -7.11%) is down 7% after the company missed iPhone unit
sales estimates and offered disappointing guidance for the fiscal first
Fiscal fourth quarter results were fairly strong overall. Apple beat estimates on the top and bottom line for the sixth quarter in a row. Revenue grew 20% to $62.9 bln, above the company's $60-62 bln forecast.
Lower than expected iPhone shipments were offset by higher than expected pricing. iPhone shipments grew 0.4% to 46.9 mln, missing estimates of closer to 48 mln. The average selling price (ASP) of iPhones grew 28% to $793 versus estimates of closer to $730.
Higher iPhone ASPs and services revenue are the key tenets of the Apple investment thesis. While ASP growth was impressive, service revenue of $10 bln narrowly missed estimates. Service revenue grew 17%, or 27% excluding a one-time favorable adjustment from last year.
On the call, Apple announced that it will no longer disclose product shipment data each quarter. Investors rarely like reduced disclosure. Bears are quick to point out that Apple doesn't want to disclose iPhone shipments because they won't be growing going forward. Apple also said it will disclose gross profit from its services offerings, which will highlight the profitability of that growing business. It's not a huge surprise that Apple is changing its disclosures in order to craft the investment narrative.
The smartphone market is saturated, and the replacement cycle is growing longer, so unit growth will be increasingly hard to come by. Apple has wisely chosen to increase ASPs to sustain top-line growth.
Apple's forecast for the first fiscal quarter came in towards the low-end of expectations (up 0.8-5.3% to $89-93 bln). Still, Apple tends to come in at the high end of its sales forecast, so analyst estimates were probably more accurate than they were “too bullish”.
A somewhat commoditized hardware business could typically earn a 10x earnings multiple. On the other hand, one could slap a 10x sales multiple on Apple’s high-margin services business based on trading multiples for high-quality cloud software companies.
With a $1 trillion market cap, Apple trades at just over 15x EPS, a slight discount to the S&P 500.
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