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Apple (AAPL) Down 19.6% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Apple (AAPL - Free Report) . Shares have lost about 19.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Apple due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Apple Q4 Results Benefit from Wearables & Services Strength

Apple reported fourth-quarter fiscal 2018 earnings of $2.91 per share that beat the Zacks Consensus Estimate by 12 cents and surged 41% year over year.

Net sales increased 19.6% year over year to $62.90 billion, which surpassed the Zacks Consensus Estimate of $61.49 billion. Apple benefited from double-digit revenue growth in all geographies. Robust performance from Services segment and wearables were other drivers.

iPhone Details

Total iPhone unit sales of 46.89 million remain unchanged year over year. The company launched iPhone XS and iPhone XS Max in the quarter.  

Apple witnessed 20% or more growth in several markets, including Japan, Australia, New Zealand, Sweden, Norway, Chile and Vietnam.

Revenues from iPhone grew 20% from the year-ago quarter to $37.19 billion and accounted for 59.1% of sales. The upside can be attributed to higher iPhone average selling price (ASP), which increased to $793 from $618 a year ago.

Higher ASP and strong iPhone revenues reflect increasing loyalty of the company’s consumers. Apple quoted a latest survey report from 451 Research, which stated that customer satisfaction was 96% for iPhone 8, 8 Plus and iPhone X.

Services Momentum Continues

Services — including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services — increased 17% year over year to $9.98 billion and accounted for 15.9% of sales.

Apple stated that paid subscriptions have surpassed $330 million, an increase of more than 50% year over year. The number of apps offering subscriptions also continues to grow and there are almost 30,000 available in the App Store, currently.

Apple Pay’s transaction volume tripled year over year. Apple Pay generated more mobile transactions than PayPal (PYPL). The service is now accepted by the likes of Costco and Neiman Marcus. Management stated that 71 of the top 100 merchants and 60% of all the U.S. retail locations currently support Apple Pay.

Apple recently launched student ID passes at several major U.S. universities, which is expected to further improve Apple Pay’s adoption rate.

Further, Apple Pay cash is currently the top-ranked mobile peer-to-peer service, according to Consumer Reports.

iPad, Mac & Other Segment Details

Apple sold almost 9.70 million iPads in the quarter, down 6% year over year. Revenues of $4.09 billion decreased 15% year over year and accounted for 6.5% of sales.

The company reported iPad growth in Latin America, Europe, Japan, India, and South Asia. Moreover, almost half of iPad purchases in the quarter were by customers who are new to iPad. Apple stated that active installed base of iPads reached a new all-time high in the quarter.

Per NPD, cited by Apple, iPad had 58% share of the U.S. tablet market in the September quarter, up from 54% share a year ago. According to 451 Research, iPad customer satisfaction ratings were 96% for both iPad and iPad Pro.

Apple Mac unit sales declined 2% year over year to almost 5.30 million. Mac revenues of $7.41 billion increased 5% from the year-ago quarter and accounted for 11.8% of sales. The year-over-year growth was driven by robust sales of MacBook Pro (launched in July) and positive impact of the back-to-school season.

In September, Apple introduced macOS Mojave, which comprises new features like Dark Mode, Stacks and a completely redesigned Mac App Store.

Apple witnessed solid growth in Latin America, India, the Middle East and Africa, and Central and Eastern Europe. The company stated that active installed base of macs reached a new all-time high in the quarter.

Wearables’ Robust Performance

Other products, including revenues from Apple TV, Apple Watch, Beats products, iPod, and Apple-branded and third-party accessories, jumped 31% year over year to $4.3 billion and accounted for 6.7% of sales.     

Total revenues from wearables, which include Apple Watch, Beats and AirPods, increased more than 50% year over year. Apple expanded distribution of HomePod to Spain and Mexico.

The company also opened new stores in Italy, Japan and China during the quarter. Apple is set to open a new store in Thailand, which will bring the number of stores to 506, almost half of which are outside the United States.

Geographical Performance

The Americas (43.7% of sales) generated revenues of $27.52 billion in the quarter, up 19% year over year.

Europe (24.5% of sales) generated $15.38 billion in revenues, up 18% on a year-over-year basis.

Greater China (18.1% of sales) increased 16% from the year-ago quarter to $11.41 billion. Business in China was backed by not just iPhone X but also Mac, Watch and Services.
    
Revenues from Japan (8.2% of sales) soared 34% year over year to $5.16 billion.

Rest of Asia-Pacific (5.5% of sales) generated revenues of $3.43 billion, up 22% year over year.

Country wise, Apple reported 25% or higher growth in Germany, Italy, Sweden, Switzerland, Japan and Korea.

Operating Details

Gross margin expanded 40 basis points (bps) on a year-over-year basis to 38.3%, which was within management’s estimate of 38-38.5%.

Operating expenses increased 17% year over year to $7.97 billion due to higher research & development (R&D), and selling, general and administrative (SG&A) expenses, up 25.1% and 10.5%, respectively. The operating expenses figure was within the management’s estimate of $7.95-$8.05 billion.

Operating margin expanded 60 bps on a year-over-year basis at 25.6%.

Balance Sheet & Cash Flow

As of Sep 29, 2018, cash & marketable securities were $237.1 billion compared with $243.7 billion as of Jun 30, 2018. Term debt was $102.51 billion and commercial paper outstanding was $11.96 billion.

Cash flow from operations was $19.5 billion in the fourth quarter.

Apple returned about $23 billion in the reported quarter through dividends and share repurchases.

Guidance

For first-quarter fiscal 2019, revenues are projected between $89 billion and $93 billion. Apple expects $2 billion of foreign exchange headwinds to negatively impact top-line growth.

The company also stated that it is facing headwinds in emerging markets like Turkey, India, Brazil and Russia, primarily due to weakening domestic currency that has forced the company raise prices of its products.

Management stated that beginning first-quarter fiscal 2019, Apple will no longer provide unit sales data for iPhone, iPad and mac.

Gross margin is expected to be 38-38.5%, while operating expenses are projected to be $8.7-$8.8 billion.

Other income/(expense) is estimated to be $300 million, while tax rate is expected to be 16.5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Apple has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Apple has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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