Expectations Are Running High For Apple
Apple AAPL reports after the close today and expectations are definitely on the positive side for the December quarter with the stock up over $16 or 12.6% to $143 in the past six trading sessions. Apple’s recent strength is mirrored in most of the other FAANG (Facebook, Amazon AMZN , Apple, Netflix NFLX , Google/Alphabet) stocks and Microsoft MSFT .
Since Apple has not given guidance the past three quarters, the highly anticipated new 5G iPhone started shipping in the December quarter and numerous other Apple products are seeing strong demand by people working from home, it may turn out that the company’s December quarter was stronger than anticipated. For the stock to continue on its run this scenario will need to come to fruition.
Preview thoughts from three sell-side analysts
Dan Ives from Wedbush (price target of $175) wrote in his Apple preview note, “Based on our Asia supply chain checks, we strongly believe the iPhone 12 super-cycle hype has become a reality with this week giving the Street its first glimpse of underlying iPhone 12 demand and key commentary from Cook looking ahead into the next few quarters. With more order activity kicking in over the last few months for iPhone 12 our reads are very bullish for the March/June quarters and give us incremental confidence in our super-cycle thesis on iPhone 12.”
Katie Huberty at Morgan Stanley MS (price target of $152) wrote in her preview note, “Our recent conversations suggest investors expect Apple to release solid, but not great, December quarter results. We disagree and believe that Apple is likely to report all-time record quarterly revenue and earnings. Our checks point to strength across Apple’s entire Product and Services portfolio, and we model double digit year-to-year growth for all 5 revenue segments in the December quarter, with risk skewed to the upside for iPhone, Mac and Services.”
Toni Sacconaghi from Bernstein (price target of $120) wrote, “While our estimates are above consensus, we believe our numbers are relatively in line with buy-side expectations. We expect Apple to provide “guidelines” rather than “guidance” for Q2, but are above consensus, likely due to currency, and our expectation for modestly stronger than normal seasonality due to timing of the iPhone 12 rollout.”
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He added, “So what’s next? On one hand, our analysis indicates that APPL outperforms 65% – 80% of the time in the near term when revenue revisions are positive. On the other hand, opportunities for upward revisions for 2021 estimates are likely to be more muted post this quarter. Q2 to Q4 revs are typically seasonal, Apple will be staring down very strong iPad and Mac comps in the second half, and it is unclear if next year’s iPhone cycle will offer compelling new functionality.”
The December 2020 quarter is expected to be the first one with revenue breaking $100 billion. The published consensus from 27 plus sell-side analysts is:
- December quarter revenue: $103.3 billion, up 12.5% year over year
- Range of $98 to $110 billion
- December quarter EPS: $1.41, up 13% year over year
- Range of $1.23 to $1.56
Philip Elmer-DeWitt tracks a number of sell-side analyst estimates and his tally of a dozen of them provides a bit more context on what is driving the increase from last year. From his table you can discern how much revenue each segment will contribute and grow from a year ago. Of the $10 billion increase in hardware revenue:
- iPhones, driven by the new iPhone 12, is $5 billion higher
- iPads and Macs each contribute almost $2 billion each in greater revenue
- Wearables are also strong, up $1.6 billion from a year ago
Services will continue its pattern of growing about $2 billion year-over-year
iPhone has to have its best quarter ever
The iPhone having its best quarter ever will probably happen, the key question is by how much and will it be enough. While Apple hasn’t provided unit results since the September 2018 quarter, one data point to use is the historical iPhone revenue increase from the September to December quarter and see how it compares to expectations.
- 2012: $30.7 billion, up 84% quarter-to-quarter
- 2013: $32.5 billion, up 67%
2014 is one of more interesting comparisons since it is when the larger screen iPhone 6 and 6 Plus were launched and there was wide speculation of larger screen iPhones becoming available in late September. Therefore, buyers waited until the December quarter to buy or replace their iPhone.
- 2014: $51.2 billion, up 116% quarter to quarter
- 2015: $51.6 billion 60%
- 2016: $54.4 billion, up 93%
- 2017: $61.1 billion, up 112%
- 2018: $52 billion, up 41%
- 2019: $56 billion, up 68%
These are the iPhone revenue growth estimates from the three analysts quoted earlier:
- Dan Ives at Wedbush: $59 billion, up 123%
- Katy Huberty at Morgan Stanley: $63.9 billion, up 141%
- Toni Sacconaghi at Bernstein: $64.8 billion, up 145%
Valuation and cash
Even though Apple is spending billions of dollars each quarter to buy back stock and is shrinking its net cash position, it still had net cash of just under $80 billion at the end of September. This equates to $4.60 per share.
The sell-side consensus EPS for fiscal 2021 and 2022 are $4.03 and $4.37, respectively. At Tuesday’s closing price of $143.16 this equates to a P/E multiple of 35.5x and 32.8x, respectively. While Apple’s $80 billion in net cash is a huge amount, when taken into account it only drops the PE multiples by 1.
This graph from Sacconaghi at Bernstein shows Apple’s relative PE multiple vs. the overall market. It clearly shows that Apple’s valuation is clearly extended vs. history.
Stock is overbought going into the results
Apple’s shares have almost doubled from the beginning of 2020 and in the past six trading sessions is up almost 13%. In the graph below (upper right portion) the stock’s RSI or Relative Strength Index is just below 70, which shows the stock is in an overbought condition. This should be a headwind, in the short-term, for the stock to move materially higher.