Apple will report June quarter results on Thursday, July 30th. The June quarter will be messy for all companies, including Apple, with revenue and earnings likely down around 10% y/y. While the numbers will be noisy—magnified by the fact that neither the company nor many of its peers provided guidance citing market uncertainty—we expect the June quarter results to instill confidence that the company will return to its growth curve next year. Investor confidence will be based on Apple’s strong cash position and commentary about upcoming products that tap into long-term undeniable growth movements (5G, digital health, working and learning from home, services, and autonomy).

While 2020 will remain unpredictable for all companies, we believe Apple’s cash position and product roadmap put shares of AAPL on a path to reach $500 and beyond in the years ahead.

Key June metrics:

• Cash: Apple ended the March 2020 quarter with $193B in total cash including $110B in debt, or $83B in net cash.  We expect total cash at the end of June 2020 to be $185B including of $110B in debt, or $75B in net cash. The topic of Apple’s cash position is more complex than its cash balance. Apple has outlined a goal to be net cash neutral over time, suggesting that total cash will eventually equal debt.  This is good news for investors—they can expect in the years ahead an additional $83B in cash will be returned through buybacks and dividends or otherwise strategically deployed. Some of that cash has already been committed to investors through the company’s capital return program. The challenge is that the company is generating so much net income that the road to net cash neutral is long and slow. Apple has generated $57.2B in net income over the past four quarters and returned $90.4B in capital, or net $33.2B returned to shareholders over the year. At this pace, it will take the company two to three years to be net cash neutral. In the end, Apple has a good problem when it comes to cash—a gravy train of cash returning to investors, which is not fully appreciated.
• Revenue: We expect revenue of $49.5B (down 8% y/y) compared to the Street at $51.9B (down 4% y/y).
• Earnings: We expect EPS of $1.92 (down 12% y/y) compared to the Street at $2.02 (down 7% y/y).
• Guidance: When the company reported March quarter results they did not provide guidance. We don’t expect guidance for the Sept. 2020 quarter.
• iPhone: We expect iPhone revenue (42% of sales) to be down 20% y/y to $20.8B, below the Street’s $22.2B estimate (down 15% y/y). We believe the company will hint that its annual fall iPhone release is largely on track.
• Services: We expect Services (27% of sales) to be up 18% y/y to $13.5B, in line with 17% y/y growth last quarter. We are not clear on the consensus estimate for Services revenue; we believe investors are hoping for similar growth compared to the March quarter.
• Wearables: We expect wearables (10% of sales) to be up 15% y/y, compared to up 44% last quarter. Apple does not report this metric but frequently comments on the segment’s sales trajectory.
• Mac: We expect Mac revenue (9% of sales) to be down 20% y/y to $4.7B.
• iPad: We expect iPad revenue (9% of sales) to be down 15% y/y to $4.4B.

Some perspective on the June quarter

The June quarter falls within a once-in-a-lifetime event (we hope). Traditional metrics (sales, units, ASPs, gross margin) are less relevant given this historically different period. The June quarter is an opportunity to look for relevant information about Apple’s current strength, future prospects, and true intrinsic value.

In the past, we have referred to this period as the National Pandemic Adjustment Period, coined by St. Louis Federal Reserve President James Bullard. During this period we intentionally shut down major swathes of our national and global economy to achieve national health objectives. Similar to the March 2020 quarter, what occurred in the June quarter should be viewed as an aberration, both in positive and negative terms. To try and apply traditional norms, measures, and metrics is of limited value.

Financial strength can be gleaned from June results

First, an update about the most important metric at the moment, the company’s balance sheet and ability to generate cash. At the end of the March quarter, Apple had $193B in total cash on hand ($83B in net cash after debt). Over the last six quarters, since they announced plans to be net cash neutral over time, net cash has declined on average $9B per quarter. We expect net cash will be down about $10B in the June quarter as the company makes progress towards net cash neutral. That implies ending the June quarter with $75B in net cash and near $180B in total cash.

Financial strength is a key indicator of how any company will navigate the path out of this difficult period to the destination of the new normal on the other side once the pandemic has passed.

March quarter showed Apple is successfully weathering the storm

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 was a win and is representative of the strength of Apple’s presence in our lives. The company also increased the share buyback by $50B, which is unprecedented in the face of lower revenue visibility over the next several quarters. What was lost in March earnings was 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.

The months ahead should favor Apple

The months ahead will have many unknows. What we do know is that Apple entered the pandemic strong, and today the company’s products are an even more foundational part our lives as we work, live and play from home.

The long-term path to AAPL at $500 and beyond

2020 is an unknown. However, the powerful trends that were in place within technology, media, and health will still be in place when this period of uncertainty ends. The trends that Apple will ride over the next decade include:

• 5G driving both a device upgrade cycle and trailing benefits from what the technology enables.
• Original content and streaming entertainment garnering a larger share of media consumption.
• Software services continuing to penetrate more industries.
• The growing use of Apple Pay.
• 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 with Apple Glasses available sometime around 2022.
• Autonomous systems—while it’s unclear what form it will take, we expect Apple to make an entrance into autonomy.

In other words, Apple has positioned itself such that many of the prevailing winds over the next decade are at the company’s back. Additionally, the 2020 downturn may prove to be a positive for the company. Apple will leverage its financial strength, anchored by what we expect is $185B in cash, to retain and acquire talent and technologies that will advance the company’s agenda.

Putting it all together, we’re optimistic regarding Apple’s prospects over the next five years. We believe the company can generate $22.00 in GAAP earnings in 2023. As a point of reference, the handful of analysts modeling out to 2023 are currently expecting GAAP EPS of $17.40. Applying a 23x multiple to our $22.00 2023 earnings estimate yields a $506 share price. Multiple expansion provides an additional avenue for upside well beyond $500. Shares of AAPL currently trade at a multiple below that of the other FAANG companies.

The sharp contrast to Apple and Amazon’s valuation

Amazon is an inspiring company, taking its leadership position in online retail and cloud solutions and funneling those profits into innovations around the future of delivery, brick and mortar commerce, and gaming. Similar to Apple, Amazon runs its business for the long term. However, from a valuation perspective, investors view the two companies differently.

Over the past four quarters, Amazon has reported net income of $10.6B compared to Apple at $57.2B. Despite the fact that over the past year Apple reported net income more than 5x greater than Amazon, both companies share a similar ~$1.55T market cap.  While the past is not an indicator of future performance, we believe this discrepancy illustrates a climate of muted investor optimism for Apple compared to Amazon. We expect Amazon will continue to be successful. At the same time, we expect Apple to report results that will surprise investors to the upside as the company emerges from the pandemic even better positioned to return to its long term growth curve.

Disclaimer