Apple's Q1: Here's The Bottom Line

Apple Inc.AAPLfirst quarter results were released after Tuesday's market close and investors cheered the results and pushed the stock higher by around 5 percent.

According to Maynard Um of Wells Fargo, Apple's report contained a combination of good and bad, which prompted the analyst to maintain a Market Weight rating with a valuation range boosted to $110 to $125 from a previous $105 to $120.

The Good

• Apple's 78.3 million iPhone units and average selling price of $695 were ahead of the analyst's estimates of 78.0 million and $685, respectively.
• Apple's fiscal second-quarter revenue and gross margin guidance is ahead of the current low investor expectations but below consensus estimates.
• Service revenue of $7.2 billion grew 18 percent year-over-year and exceeded the analyst's estimate of $6.9 billion.
• Management reiterated its prior view that its Revenue segment will be the size of a Fortune 100 company which implies at least $28.0 billion in revenue.
• Mac revenue saw year-over-year growth for the first time since the last quarter of 2015.
• Apple saw record revenue in all major region except Greater China although mainland revenue in China was flat year-over-year and up 6 percent in a constant currency basis.

The Bad

• Q1 EPS was partially offset by lower gross margins.
• Apple expects foreign exchange rates to impact Q2 revenue and gross margins.
• Management's gross margin guidance range was widened to 100 basis points versus 50 basis points historically.
• iPad units of 13.1 million fell short of the analyst's estimates of 15.7 million.
• Growth from China isn't expected to be dramatically different year-over-year in Q2 versus Q1.
• Management's guidance implies operating margins will be down on a year-over-year basis for the sixth straight quarter.

The Analyst's Bottom Line

"We recognize that potential tax reform, incl. a cash repatriation holiday, could help AAPL's capital allocation program in Apr. (though it's unclear if repatriated cash will be allowed to be used for share repos, dividends, debt repayment, etc; it was not in 2004)," Um argued.

"This, as well as investors' views for an iPhone 8 "super cycle", regardless of our view that expectations are too high, is likely to limit downside risk near term. We raise our F17 EPS to $9.01 from $8.83 and adjust our valuation range to $110–$125 (13x C17) from $105–$120 but maintain our Market Perform rating as we see these as offset by uncertainties around off-cycle demand, June guide, and litigation."