Conclusion: Apple was the most at-risk large US tech company for reporting a disappointing March quarter due to the company’s hardware businesses and exposure to China. Given these headwinds, reporting 1% revenue growth is a win and is representative of the strength of Apple’s presence in our lives. That said, 2020 will remain unpredictable for all companies, including Apple.
What’s lost in March earnings is the significance of the measures the company is taking to manage the business for long-term revenue growth and profitability. That means Apple is continuing its previous product release schedule along with plans to invest in future products and services. This approach will likely yield a stronger product roadmap versus other competitors and larger growth opportunities in 2021. Also lost is the company’s financial strength, increasing the share buyback by $50B, which is unprecedented in the face of little revenue visibility over the next several quarters.
Regarding the near-term, Tim Cook was clear that Apple’s business is showing signs of an uptick in the month of April across all geographies, but cautioned that iPhone and Wearables (60% of revenue) would worsen in June. Those comments left investors modestly disappointed after hearing other tech companies report early signs of stabilization. It’s worth mentioning, even after the pull-back, Apple shares are up 17% in the month of April.
Key takeaways:
- We believe Apple’s revenue was growing at 12% for the first seven weeks of the quarter and was down 17% for the final five weeks. Since April, revenue growth has improved but is still likely down year over year. This is illustrated in Cook’s comments that all geographies are improving, but to expect iPhone and Wearables (60% of revenue) to “worsen from March.” In other words, Apple’s business has improved from its lows but has yet to stabilize, which we expect in the September quarter. The company did not give guidance, but we expect June revenue to be down 5-10%.
- Services (20% of revenue) will be stable. The negative of lower Google Search and Apple Care revenue will be offset by the positive of more app downloads and iCloud usage.
- iPad and Mac (16% of revenue) will improve quarter on quarter, driven by increased demand related to working, learning, and playing from home.
- Apple’s product roadmap is on track. We expect iPhone 5G to be announced in late September and to have broader availability sometime late in October. As a reminder, iPhone 5G’s breakout years will be FY22-FY24, given what will be modest global coverage upon launch.
- Apple’s supply chain took a dramatic step downward in the middle of the quarter and has since bounced back. This resulted in channel inventories exiting the March quarter surprisingly in line with expectations.
- China showed improvements from February to March and again in April. Overall, we think the China business is currently trending flat year over year.
Cash is king.
Apple’s earnings power is often missed during these messy quarters, reporting $11.3B in GAAP net income. As a point of comparison, Amazon reported March GAAP net income of $2.5B. Despite the earnings power difference, both companies are essentially valued at $1.2T. Amazon is growing much faster, likely 20% in the June quarter compared to Apple, which will likely be down 5%+. Fast-forwarding to next year, we expect Apple will grow revenue at a similar rate to Amazon.
The long-term view.
2020 is an unknown. However, the powerful trends that were in place within technology, media, and health will still be in place when this current period of uncertainty ends. Some of these trends include:
- 5G driving both a device upgrade cycle and trailing benefits from what the technology enables.
- Original content and SVOD increasing share of media time spent
- Software services continuing to penetrate more industries.
- Health becoming personal and preventative – wearables for data collection, AI for analysis, and consumer software as the interface.
- Augmented Reality emerging as the next major computing platform.
In other words, many of the prevailing tailwinds over the next decade are at Apple’s back. Additionally, the 2020 downturn may prove to be a positive for the company, given Apple’s financial strength, anchored by $83 billion in cash, which will be used to retain and acquire talent and companies to advance their agenda.