Apple Q4 Results Unfairly Punished – Seeking Alpha

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After the bell on Thursday, we received fiscal fourth quarter results from technology giant Apple (AAPL) for its September ending quarter. This was always going to be an unusual report, given the later than normal iPhone launch timeline due to the coronavirus. Unfortunately, while all of the company’s non-smartphone segments beat street estimates, the stock was seemingly punished as iPhone revenues came in weak.

As I mentioned in my earnings preview article, the street was expecting both top and bottom line declines. In fact, Seeking Alpha’s estimates page showed the average estimate coming down by $370 million to $63.33 billion in the last couple of days, reflecting some caution into the report. Apple ended up with revenues of just under $64.7 billion and EPS of $0.73, which was very close to my Estimize prediction of $64.78 billion and $0.75, respectively. In the table below, you can see key results over the past three fiscal Q4 periods.

*Percentage changes over prior year period, except for categories that normally use percentages. Prior period share counts adjusted for this year’s stock split. Source: Apple quarterly reports, seen here.

If we look at what most analysts were expecting, the company came in ahead of street averages for every category except the iPhone. Each of the categories except for the smartphone beat by at least $275 million, highlighted by the Mac line blowing out the street. The work in home trend has certainly helped Apple in terms of computer and tablet sales, and the company saw strong growth with services and wearables as well.

The stock’s drop was due to iPhone sales coming in perhaps a billion shy of the street, but why is this a surprise? Everyone knew there were no new phones launched in September like we’ve seen in the past, so the phone was likely to see a big decline against last year’s launch period. As I’ve mentioned in the past, I was more focused on everything else this quarter, and all of those segment line numbers came in very strong.

Perhaps part of the problem is charts like the following that made the rounds on Twitter, which make it seem like the iPhone is a fraction of what it used to be. Unfortunately, the chart is totally wrong, because Apple went from reporting unit sales in millions to now reporting segment revenues in billions. The company never peaked out at nearly $80 billion in iPhone revenues, rather it was above 78 million iPhone units in fiscal Q1 2017, which only amounted to $54.378 billion in iPhone revenue.

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(Source: zerohedge twitter, seen here)

While the bottom line also beat the street by 3 cents, it seems that investors were likely expecting a little more. That’s a function of no new iPhone revenues coming in at decent margins, although the company’s overall gross margin percentage still rose thanks to further improvement in service margins. As more expenses move to the operating side, it was not a surprise to see operating income decline also. A drop of $376 million in other income also pressured the bottom line, partially offset by a lower tax rate and the buyback.

The company did not provide fiscal first quarter guidance in its earnings release, but that’s hardly a surprise. However, management on the call did say iPhone revenues would be up year over year, while all other products would be up double digits. Two models of the iPhone aren’t coming to the market until next month, so that provides a lot of uncertainty for sales and other items. Management did return $22 billion in capital to shareholders in Q4, continuing the strong buyback as the company looks to get to a cash neutral position.

I also mentioned in my preview article that Apple shares entered this report at an interesting junction. They were below the 50-day moving average, and that key trend line was starting to roll over. With shares down 5.6% on Friday, the 50-day is likely to start moving lower, and that could provide some resistance for the stock, especially if US markets continue their recent struggles.

(Source: Yahoo! Finance)

For all the gloom and doom there is surrounding Apple currently, investors should also see what the street has said since. Most analyst notes were fairly positive, and the average street revenue estimate for the current quarter has risen by more than $1.65 billion since Thursday’s report, with average EPS number up 2 cents a share. If things were so bad, you would expect estimates to go down, but in fact they are going up. That makes the valuation a bit more attractive as well, given shares moving lower.

In the end, Apple announced a tremendous quarter considering no new iPhones were launched in the period. All other segments beat analyst estimates rather nicely, showing that the company is doing well in this work from home environment. The stock is being punished because of the iPhone revenue miss, but that’s hardly a surprise given this year’s launch timeline. The average price target on the street is nearly $123, which implies double digit upside from here, so the Friday pullback only makes this an even more attractive opportunity for long term investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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