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Apple Delivers In Stormy Seas
What we can't get in sales we'll make up for with buybacks and payouts.
That appears to be the mantra at Apple, where Tim Cook's at pains to placate impatient investors disillusioned with slowing sales, an ambiguous AI roadmap and pressing questions about iPhone demand in China, the company's most important overseas market.
Revenue in fiscal Q2 fell 4% YoY to $90.75 billion, Apple said Thursday. That was slightly better than the $90.33 billion the Street expected, but nevertheless represented
Lots of analyst questions about China (where mgmt is “long term” optimistic albeit in the “most competitive market in the world”) and about what AAPL will do in/with/about genAI (“exciting” announcements coming, but Cook also said “not within next quarter or so”). With capex of merely $2BN/qtr, some might wonder what AAPL expects to do in genAI; it would seem unlike AAPL to put core features and customer data on, say, AWS or Azure, so either big capex is coming or AI processing will be device-side? Services growth was a bright spot but CFO noted comps get tougher, indeed YOY comp is +270bp harder in Jun qtr and another +800bp harder in Sep qtr. Jun qtr guide was about inline on revenue and implies about inline on EPS. On share buybacks, $23BN in Mar qtr was impressive but cash flow modeling does not, to me, clearly suggest there is scope to increase the pace dramatically. On valuation, AAPL looks about in the middle of its post-pandemic P/E NTM range, but totally outside of its pre-pandemic range. No, not all of the mega-techs are currently inhabiting a P/E NTM range completely outside their pre-pandemic ranges. Is AAPL’s position and outlook dramatically more exciting now than it was in, say, 2019? If not, there is a lot of capital here to donate to worthy, needy names.
I guess. But at the end of the day, making a bear case for Apple’s a bit like trying to argue that Apple’s products aren’t superior. Yes, people can and will make the case. But they’ll be wrong.
I think this is pretty clear from my Apple commentary, but I’m personally disappointed in the lack of new products over the past decade and a half. Ultimately, though, there’s an objective reality here that says the competition just isn’t anywhere close and probably never will be, or at least not on the things that matter to average consumers. When you get a new Mac, the unboxing process makes you feel like a five-year-old at Christmas again. And that’s coming from me, a man who thinks fun is something people should grow out of. Also, Apple’s equity is a haven asset for all intents and purposes.
I love Apple products, have been a fanboi for decades, going back to the Apple II and then the Newton, don’t see myself ever using anything but iPhones, Apple Watches, and (outside of work) Macs.
But there’s Apple and there’s AAPL. Can AAPL keep trading at 25X P/E NTM without a solid claim on future growth drivers? GOOG is 22X, MSFT 30X and they have pretty clear stories where their future growth is supposedly coming from, in addition to having robust current growth which AAPL, at this moment, does not.
I think the question on the call about capex was interesting.
You’re forgetting Airpods, so three new products in however many years. Of course the goggles barely count (have you ever actually seen a set in the wild?), so it might as well be only two.
I had thought AAPL would be deeper into “connected house”, combining Mac, Apple TV, HomePod, Airport, with pocket-change acquisitions of Nest, Blink, etc. Nope. Houses are being controlled through AMZN Alexa, if anything.
I had also thought AAPL would be deeper into “wearables”, building on Watch, Airpod, Airtag, Siri, iPhone. Nope, it took META to make the first really popular smart glasses.
iPhones are the best handsets, but when I can hear texts, answer calls, send messages, play music, take photos, get information, etc with my phone in my pocket, maybe I start to care less what kind of phone it is. When I can also see information and read messages on the what will then be “AR glasses”, maybe the handset in my pocket matters even less.
Services have been AAPL’s growth engine, especially at the gross profit line. But wouldn’t some discernible progress in making Siri “intelligent” make that runway look longer?
If you’d have asked me in 2007 , coincidentally the year I brought my first iPhone, if I could ever live without my Blackberry I know what my answer would have been. I feel the same way about Apple products now.
Any company, not just Apple, has limited choices among strategies for improving financial performance. Assuming that EPS, which when multiplied by a market multiple, creates a share price, is the ultimate goal, along with some sort of growth, there is a waterfall of those limited choices.
1. Revenue is the top line, the best goal of all, and the most difficult to achieve. As the chart shows, this metric is not working for Apple right now.
2. Since the desired end result of profit growth is actually the target, a company’s second choice is to seek ways to cut costs, creating profit growth when revenue growth falls short. This is a popular choice, not to be confused with cuts in selling price. Cutting costs likely cause a rise in the bottom line and can, under some circumstances, actually create a source of competitive advantage, as the firm with the lowest total cost of operation amongst its competitors, will die last (called the low cost producer).
3. The first two choices are generally executed through one or more optional “business strategies.” However, growth and cost structure can also be improved through changes in “corporate strategy.” Business strategy refers to how a firm conducts each of its business lines. Corporate strategy refers to decisions about just what businesses in which a firm chooses to participate. For example, dumping one’s weakest business, with slow growth, low pricing power, etc., raises the performance of the rest of the firm (see J&J). Spinoffs, selling off various units, and mergers that increase scale and reduce average costs, etc., are all popular choices for improving a firm’s overall results without actually improving the results of any one of its business units.
4. When none of these directions includes possible opportunities for improving actual operating outcomes then the firm must look to financial engineering:
a. Simple financial leverage improves ROI without the need to improve operating outcomes as long as earnings returns exceed the cost of the debt.
b. Next on the list is to reduce any dividend paid. EPS goes up and so does net cash flow but stock price is likely to decline.
c. Finally, we have the ever-popular share buyback, which raises EPS on shares remaining outstanding, but has no positive impact on growth, profits, or total firm value. If a manager is doing this, regardless of any excuses to the contrary, it means all else has failed or the boss is lazy and lacks creativity, and for me, I’m a seller.