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Apple's Q1: Here's The Bottom Line

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Apple's Q1: Here's The Bottom Line
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Apple Inc. (NASDAQ: AAPL)'s fiscal first 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."

Latest Ratings for AAPL

DateFirmActionFromTo
Jan 2018Longbow ResearchDowngradesBuyNeutral
Dec 2017InstinetDowngradesBuyNeutral
Nov 2017Wells FargoReinstatesMarket PerformMarket Perform

View More Analyst Ratings for AAPL
View the Latest Analyst Ratings

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