Company Overview: Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company's segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company's other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings.


AAPL Details

Apple Inc. (NASDAQ: AAPL), formerly Apple Computer, Inc., is into the designing, manufacturing and marketing of mobile communication and media devices, personal computers and portable digital music players. The offerings by the group include related software, accessories, networking solutions, services, third-party digital content and applications; and major products and services include iPhone, iPad, iPod, Mac, Apple Watch and TV, iPhone OS (iOS), OS X and watch OS operating systems, Apple Pay, iCloud etc. This technology sector bellwether has come under some pressure lately with the overall tech sector softness and investors’ concerns over iPhones’ sale. However, the services’ segment provides revenue from app-store sales, Apple Pay, AppleCare, and music streaming subscriptions; and is witnessing strong growth. This has enabled the group to focus more on its services-led offerings, and subscription services that provide a secular trend, are expected to bring the stock back on track. The company is thus expected to retain EBITDA and operating margins along with return on equity above the respective industry medians.


Financial Performance (Source: Company Reports and Thomson Reuters)

Weakness in iPhone demand: Looking at the sales scenario, it is expected that Apple will produce fewer iPhones in 2019 as its key suppliers, Lumentum, Japan Display Inc and British chipmaker IQE Plc have indicated for a bleak outlook on shipments. In effect, the shares of AAPL’s suppliers and assemblers have slipped as many component makers flagged warning signs about the weaker than expected results. This came at the back of deterioration in iPhone sales in several key markets. For instance, Taiwan-based assembler, Hon Hai Precision Industry Co Ltd.’s (Foxconn) stock weakened by over 3%; and Rival Pegatron Corp’s stock toppled by over 5%; and both these companies are AAPL’s major customers. The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co.’s stock fell by 2.6%, and Flexium Interconnect Inc fell down  by 1.5%. California-based tech giant, Cupertino witnessed its shares to be at the lowest level in over three months. AAPL has recently told its smartphone assemblers to halt plans for additional production lines dedicated to the new lower priced iPhone XR and this has also pressured supplier stocks. Apple thus requires to bring some significant technological breakthroughs to help the sales scenario. In addition, the technology stocks have been on a downtrend given the overall volatility that prevails in the market.

Beaten analysts’ expectation for the fourth quarter 2018: AAPL stock had risen after the company posted better than expected results for the fourth quarter of 2018, but gave weaker outlook for holiday season (December) quarter. As per AAPL executives, the unit sales are becoming less relevant as customers buy bundled products that include subscription services like Apple Music. Apple has planned to start giving cost-of-sales data for its services business, which is an important metric for subscription businesses. But investors reacted negatively. For its full fiscal 2018 ended in September, AAPL has delivered the revenue of US$265.6 billion and profits of US$11.91 per share, beating analyst estimates of US$264 billion and US$11.79 per share. AAPL in the fourth quarter of FY 18 has reported the adjusted earnings per share of $2.91, beating the analysts’ estimates for the adjusted earnings per share of $2.78. The earnings per share grew 41 percent, which is a record. The company had reported the adjusted revenue growth of 20 percent to $62.9 billion in the fourth quarter of FY 18, beating the analysts’ estimates for revenue of $61.59 billion. International sales accounted for 61 percent of the quarter’s revenue. Services revenue has reached an all-time high of $10 billion. Excluding a one-time favorable adjustment of $640 million recognized in the fourth quarter of fiscal 2017, the services revenue rose from $7.9 billion in the fourth quarter of fiscal 2017 to $10 billion in the fourth quarter of fiscal 2018, which is an increase of 27 percent. Apple has sold 46.9 million iPhones in the fiscal fourth quarter, which missed the analyst expectations of 47.5 million iPhones; but the average selling price of iPhones was US$793, which is well above analyst estimates of US$750.78. Meanwhile, Apple is widely expanding the use of its facial recognition unlocking system in iPhones and iPads, which uses special lasers that are produced by only a handful of suppliers. Overall, in FY 18, the company has shipped the 2 billionth iOS device, celebrated the 10^th anniversary of the App Store and has achieved the strongest revenue and earnings in Apple’s history.


Net Sales by Category (Source: Company Reports)

New iPad Pro is the most advanced, powerful iPad ever: AAPL has recently introduced the new iPad Pro with all-screen design and having the next-generation performance, which marked the biggest change to iPad ever. The all-new design has the 11-inch and 12.9-inch Liquid Retina that displays to the edges of iPad Pro and integrates Face ID to securely unlock iPad with just a glance. With over a million apps designed to take advantage of the large Multi-Touch display, including next-generation apps like Photoshop CC on iPad (coming 2019), the new iPad Pro will allow the users to have a better experience.  The new iPad Pro is a huge step forward by the company for powerful, creative, mobile computing. It has an all-new thinner design, speeds through projects with the super-fast A12X Bionic chip and unlocks with a glance using Face ID in any orientation, while the user is either sitting or standing. iPad Pro has the new Smart Keyboard Folio and new Apple Pencil. iPad Pro features the world’s most advanced display, which is having edge-to-edge Liquid Retina display that follow the curves of iPad Pro’s unibody enclosure. Moreover, built specifically for iPad Pro, the A12X Bionic is the smartest and most powerful chip in a tablet, that makes even the most demanding computing tasks like editing photos or creating 3D models faster and more responsive. This is built on industry-leading seven-nanometer technology, the powerful eight-core A12X Bionic that features four performance cores and four efficiency cores for up to 35 percent faster single-core performance and a new performance controller for simultaneous use of all eight cores for an up to 90 percent boost during multi-threaded tasks. A seven-core, Apple-designed GPU is expected to deliver up to twice the graphics performance for incredibly rich and immersive AR experiences and console-quality graphics.

Capital Management: Apple has declared a cash dividend of $0.73 per share of the company’s common stock. The dividend is payable on November 15, 2018 to shareholders of record as of the close of business on November 12, 2018. The company has returned over $23 billion to shareholders in dividends and share repurchases in the September quarter, which brought the total capital returned in fiscal 2018 to almost $90 billion.

Outlook: For the first quarter of 2019, the revenue is expected to be between $89 billion and $93 billion while the consensus estimates are made around $92.91 billion. For the first quarter of 2019, the gross margin is expected to be between 38 percent and 38.5 percent, operating expenses are expected to be between $8.7 billion and $8.8 billion, other income/(expense) is expected to be of $300 million and tax rate to be of approximately 16.5 percent before discrete items.


Returns over the years (Source: Company Reports)

Stock Recommendation: Lately, AAPL stock has been in a bear market zone with soft iPhone unit demand and concerns over average sale price. Fiscal 2019 earnings per share forecast may see some contraction; however, the new products, hardware segments, services segment’s offerings and other developments are still expected to drive results in long term and AAPL is expected to witness a stock price upside of high single digit (%) in medium to long term while stability in market would still be a significant factor that will play a role in terms of boosting the stock. The value in the AAPL stock can still be seen given resilient fundamentals and the stock seems to have support at $182 and resistance at around $230. While AAPL stock has been impacted by comments from its suppliers since mid- of 2018, the company has still managed to report better than expected results for the fourth quarter of 2018. We give a “Buy” recommendation on the stock at the current price of $ 186.80.
 

AAPL Daily Chart (Source: Thomson Reuters)

 
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