Apple Inc. (AAPL) released its financials for the most recent holiday quarter after yesterday’s closing bell, kicking off a week of Big Tech earnings that will surely test the Nasdaq’s gumption after an exceptionally brutal December performance.
While Apple’s newest numbers were a mixed bag of middling and bad, a deeper dive can help the average investor prognosticate the company’s health in 2019. Since Apple constitutes more than 9% of the Nasdaq’s total weight, a glimpse into the company’s health can also illustrate the broader tech industry’s health in this increasingly uncertain global environment.
Here’s how Apple fared during its fiscal Q1 2019 – and what these results indicate about the stock’s performance moving forward…
The Numbers
The top- and bottom-line numbers came in strong, with both earnings per share (EPS) and revenue topping Wall Street’s expectations, albeit by a small margin.
Apple earned $4.18 per share last quarter, slightly surpassing the $4.17 estimate. On the other end of the report, the company raked in revenue of $84.3 billion, which beat the consensus estimate of $83.97 billion by 0.4%. However, it’s important to acknowledge that revenue was down 5% from the year-ago quarter, marking the first yearly revenue decline during the holiday quarter since the iPhone was introduced over 10 years ago.
One of the report’s notable bright spots was Apple’s services segment, largely encompassing Apple Pay and Apple Music. Services revenue grew 19% from Q1 2018 to $10.9 billion, with an impressive gross margin of nearly 63%.
But the report becomes grim as you move into the iPhone numbers and Q2 revenue projections, both of which handily missed Wall Street’s expectations even after analysts factored in CEO Tim Cook’s Jan. 2 forecast cut.
First-quarter iPhone revenue came in at $51.98 billion, down 15% from the year-ago period and falling shy of the $52.67 billion estimate by 1.3%. Furthermore, the projected range for the company’s overall revenue in Q2 2019 quarter came in at $55 billion to $59 billion, with the low end of the range far short of Wall Street’s $58.83 billion expectation.
How Investors Reacted
Despite the rough iPhone and Q2 forecast numbers, AAPL shares surged more than 6% in after-hours trading. At its peak, the stock price hovered near $164.28, up more than 15% from this month’s low of $142.19 reached after the Jan. 2 announcement.
The buying frenzy showed investors were pleased with the simple fact that the results weren’t as bad as they could have been. In his announcement earlier this month, Cook lowered his Q1 revenue projection to $84 billion. The firm reporting a slightly higher $84.3 billion indicates that market participants were fine with that margin, as razor-thin as it was.
The Bigger Picture
Apple’s narrative for 2019 hasn’t changed much since the Jan. 2 announcement that caused the stock’s nearly 9% rout in one day. Cook started the year off blaming the same culprit that investors have blamed for most of the last 12 months: sustained trade tensions with China.
China matters to both the U.S. economy and global economic ecosystem, but the country has always remained a particularly crucial wrench in Apple’s business. Not only does the country constitute the world’s largest smartphone market, but it also manufactures the core components of many Apple products.
A related concern on the tech community’s mind is Chinese smartphone manufacturer Huawei, which has become something of a punching bag for the Trump Administration. The federal government considers Huawei a top cybersecurity threat, alleging that the firm uses its products as a means of backdoor surveillance by the Chinese government. These allegations culminated in the arrest of CFO Meng Wanzhou and formal charges against the company earlier this week.
As for its threat to Apple’s business, Huawei is set on phasing Apple out of China altogether. This became clear when Huawei’s Consumer Division Chief Richard Yu threw down the gauntlet last week by forecasting that his firm would be the world’s top smartphone producer by next year “even without the U.S. market.”
Despite the sweat-inducing nature of the threat, it’s difficult to measure the veracity of Yu’s claim at this time. The U.S. arresting one of Huawei’s top officials has turned the company into a proxy battleground in a trade war between the world’s two largest economies, so any kind of ungrounded prediction from the firm’s top brass can likely be shrugged off as bluster for the time being. While Huawei is certainly strengthening its presence in European markets, its presence in other major regions outside the U.S. mostly remains to be seen.
Even with negative sentiment surrounding the trade war front and center in analysts’ minds, Cook expressed optimism for the firm’s future when he said “we manage Apple for the long term, and this quarter’s results demonstrate that the underlying strength of our business runs deep and wide.” He went on to reference Apple’s undeniably robust product ecosystem, citing the “active installed base of devices” soared to a record high of 1.4 billion last quarter.
Looking Ahead
From a short-term investing perspective, it’s understandable to maintain a bleak outlook on the Fruit’s performance this year. Shareholders already had enough reasons to be anxious following the Jan. 2 forecast cut as well as the company’s controversial decision to stop reporting unit sales numbers of its products. Both pieces of news illuminated suspicions of a continuing slide in iPhone sales, and these suspicions were dreadfully confirmed yesterday.
But for long-term investors, there’s no doubting the fact that Apple remains a “forever stock.” Even with Huawei as a potential threat, Apple already claims more than 75% of the world’s smartphone profits, making it clear that iPhones are now the new normal. This dominance is likely to grow as newer versions continue to roll out at higher price points for the foreseeable future.
That smartphone dominance – combined with a similarly growing dominance in the services sector – ensures that Apple will remain a healthy long-term component of any investor’s portfolio.