Apple, the largest company by market cap, at an astonishing 554 billion Dollars as of last evening (that equates to over 9 trillion Rand), reported numbers yesterday. These are numbers for the first quarter of their 2016 financial year. The headline from the company on their investor relations website says: iPhone, Apple Watch, Services & Apple TV Drive All-time Record Revenue. Record quarter all around.
The WSJ however says the following: Apple iPhone Sales Grow at Slowest Rate Ever, the FT leads with Apple's iPhone growth era comes to an end, whilst the Bloomberg (not behind a paywall, most accessible) headline is Apple Forecasts First Sales Drop Since 2003 on iPhone Slowdown.
Read them all, they pretty much say and stress the same thing, the worst quarter in terms of growth rates in an absolute age (since the iPhone 5), the article point out the obvious, that the iPhone makes up two-thirds of all revenues, and stresses that the newer products (the Watch, the iPad) are not going to pick up the slack of slowing sales of the iPhone. And by slowing, sales unit numbers grew by less than anticipated, a whole 2 million units less than the market forecast, still topping nearly 75 million for the quarter, no mean feat.
And then guidance, which is also important, fell short of what the same said analyst community had pencilled in. And their biggest engine of growth, China, is perhaps not growing at the pace that the "90 dayers" were hoping for. What is a 90 dayer? It is someone who suffers from quarteritis. Quarteritis is a condition that I am certainly guilty of, when the going for a specific quarter is good, you tend to be drawn in, equally the opposite is true. Try not be a 90 dayer, try not get sucked in and suffer from a bout of quarteritis every 90 days or so.
CEO Tim Cook in fact made points worth noting about the most successful product that almost any company has ever had, from a profitability point of view, on the conference call (you will have to sign up, then it is free to read), courtesy SeekingAlpha: Q1 2016 Results - Earnings Call Transcript.
"We sold 74.8 million iPhones in the December quarter, an all-time high. To put that volume into perspective, it's an average of over 34,000 iPhones an hour, 24 hours a day, seven days a week for 13 straight weeks. It's almost 50% more than our Q1 volume just two years ago and more than four times our volume five years ago."
It is a classic Oliver Twist and gruel (thin porridge) moment from the market, perhaps Apple certainly are not the mean master, nor is the market the poor little 9 year old boy, either way
"Please, sir, I want some more." The market wants more. The market wants higher iPhone sales, it wants a new product. The last real smash hit, which seems to be falling away is the iPad. I still have the version 1 that "works" for my needs.
In fairness,
the products are so awesome that you don't really need to renew that quickly. That is the biggest issue plaguing the company, as far as Joe Investor is concerned. Forget the fact that the current product is hugely profitable for the company, which could see a refresh cycle this year no doubt (the iPhone 7) catapult the sales higher (as the 6 did), the question then comes off the higher base, how much more?
The share price reflects all of this news.
Post the results the stock is down two and a half percent. The cash and cash equivalent (around 216 billion Dollars) relative to the market cap at the open (540 billion Dollars) is nearly 40 percent, the highest percentage I can remember. The company is still growing earnings as a result of strong buybacks, the earnings multiple reflects the current reality, the stock is currently trading at less than 11 times, with the dividend yield of over 2 percent pre-tax. Granted that a lot of cash is offshore and some argue should be discounted (they would have to pay high tax rates to bring the cash back), I am sure the stock holders know that. The company also has piled on the debt, in order to facilitate the strong buyback and dividend policy.
The fact is that Apple are capturing you in their ecosystem, households are receptive to their products, the Mac is growing market share in a shrinking PC market, that tells you that the ordinary person still recognises that quality trumps the pay off on the "quality" price of the product too. As a stock holder it is concerning that a new product seems a way away, one has to remind oneself that quality is enduring. Whilst the product sales as a result of global economic weakness cited by Tim Cook seems to have set the price in a funk, the company has the resources and capabilities to reinvent, to grow other services and products through invention or acquisitions. After a while equally the currency headwinds will abate.
We continue to maintain our buy rating on the business, most especially on current weakness.