Apple Q1 16A – The facts of life

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Apple’s slowdown is completely normal and priced in.

• Apple reported steady Q1 16A results as the ending of the iPhone 6 replacement cycle is making it very difficult to grow revenues beyond their current levels.
• Q1 16A revenues / EPS were $75.9bn / $3.28 pretty much in line with consensus at $76.6bn / $3.23.
• 74.7m iPhones shipped, in line with consensus at 75m, and pricing increased to $691 which I think was largely responsible for gross margin and EPS being slightly better than forecast.
• 16.1m iPads shipped which was below expectations and reflects the ongoing weakness of the tablet market which RFM forecasts will decline by 12% this year.
• 5.3m Macs shipped which was below expectations but still represented market share gains in a continually weak PC market.
• No volumes were given for Apple TV (where I think it is too early to say) or the Apple Watch (which I think is struggling with very weak demand).
• Guidance for fiscal Q2 16E is for revenues of $50bn – $53bn which was below consensus of $55.5bn.
• The revenue guidance midpoint represents a YoY decline of 7.5% of which 4.0% is due to the strength of the US$ against most other major currencies.
• Given that Apple is coming off a year that saw a huge replacement cycle, keeping revenues broadly flat represents pretty good performance.
• This was reflected in the shares which rallied slightly in after-hours trading as many commentators had expected much worse.
• This fear was caused by suppliers, many of which, have seen meaningful cuts in orders from Apple.
• I suspect that the difference between Apple’s performance and that of its suppliers is largely due to inventory adjustments as Apple right sizes its inventory for the slower outlook this year.
• The good news is that Apple’s valuation remains incredibly undemanding with a headline 2016E PER of 10.5x which falls to 6.4x when Apple’s $216bn cash pile is taken into account.
• This makes Apple one of the cheapest technology stocks available in the market and I think that the current slowdown is more than reflected in its valuation.
• However, the shares are unlikely to race away again before a new avenue of growth is found and of this there is little sign.
• Consequently, I think that Apple remains a great place to hide for anyone fearful of a volatile market but it is not the place to be when looking for upside.
• I prefer Apple to Google, Yahoo and Twitter but there is more upside in the medium term to be found in Samsung, Facebook and Microsoft.