We have grown accustomed to lower volatility from Apple’s earnings and its stock price post-reporting. Well, what do you know? Apple (AAPL) reported better than expected 3Q17 results and the shares are responding favorably in initial trading, up about 5%. Guidance for the September quarter, a key focus point for investors, was better than expected as well, especially regarding revenue. Northlake finds the Apple results reassuring but the magnitude of the initial rise in the shares strikes as more about bearish positioning among investors heading into the print rather than fundamental upside. The story still revolves around the success of the new iPhones that will begin to ship in late September. The setup for the “super cycle” is in place with a massive installed base of 2-3 year old iPhones and the potential that the new phones, at least the high end model, have significant changes from the iPhone 6, 6s, and 7 models. Whether demand comes though or upgrade cycles continue to lengthen will determine how well the phones sell. Wall Street expectations are high for the new iPhones creating balanced risk-reward tradeoff for AAPL shares until we finally see the new iPhones in September. We are comfortable sitting tight with AAPL shares and see the potential for the stock to work toward $180-200 by yearend as we believe the new iPhones will sell well.
The just reported 3Q17 had a several positives. iPads had their first growth quarter in several years and Mac sales were strong following a refresh of many models in June. Sales in Mainland China grew for the first time in almost two years. Services and Other Product revenues surprised to the upside and represented 22% of revenue, an all-time high. These product lines, services in particular, have high profit margins and are critical to sustain Apple’s overall profitability and growth given that the iPhone business has matured with growth aligned almost exclusively with major upgrade cycles.
The other big positive coming out of the report relates to September quarter guidance. Investors have been concerned that the new iPhones could be delayed due to reports of manufacturing issues. Revenue guidance is above street estimates and working backwards it appears that unit volumes for iPhones are the reason. Apparently, Apple is confident in its normal shipment schedule for new iPhones that begins in September and leads to full availability in the critical holiday season.
AAPL is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. AAPL is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.