* The quarter leaves many questions unanswered
The Dec earnings report and March guidance may represent a defining moment for
Apple—the iPhone now is mature. We've said the supercycle is dead, long live installed
base growth. The narrative is changing even faster than we anticipated from iPhone
growth to monetizing the installed base with additional hardware and software. There
are many questions to be addressed. What happened to the supercycle? How should
we think about iPhone volume and pricing in coming years? Has Apple lost its
innovation mojo or is consumer technology in a lull? Not all is lost—the installed device
bases are growing, loyalty is high, the iPhone is gaining share, and Apple is far ahead in
wearables. Even on low-to-mid-single digit revenue and profit growth the stock is
undervalued, according to our DCF.
* Financial results will depend on more than iPhone
Revenue grew double digits across all regions. North America had the lowest growth at
10%, perhaps due to declining iPhone volume following last year's surprising US unit
growth of 11%. Near-term ASP increases and longer-term potential in new product
categories should allow Apple to grow at least in-line with consumer technology spend.
A mature iPhone means that other categories, especially services and other products,
will become material to growth.
* Purchase commitments no longer predictive
Purchase commitments and other obligations have been used to gauge next quarter's
sales and the expected timing of future product cycles. We believe Apple has expanded
its buy/sell activities with suppliers, resulting in higher levels of purchase commitments
and breaking the correlation with next quarter's sales. This change is reflected by the
spike in vendor non-trade receivables in the 10-Q, up 100% YoY and 54%
sequentially.
* Valuation: Maintain $190 price target
The stock is on its 200-day moving average, an important support level. Despite weak
sales, earnings momentum could be positive the balance of the year and support the
stock along with buybacks. Our price target of $190 is 16x our F18 EPS of $11.80e.
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