Apple (AAPL) reported good September quarter earnings driven by better than expected revenue everywhere but iPhones. Profit margins were a little light driven by the mix shift away from iPhones. A lower tax rate assisted the revenue upside to produce EPS about 10% ahead of consensus estimates. The critically important guidance for the holiday quarter was good with revenue and gross margins matching analyst estimates. Apple is known for guiding the quarter ahead below estimates, so this outlook is a positive surprise. Since this holiday quarter sales are complicated by the never before seen three new iPhone models (8, 8 Plus, and X) and uncertainty about production quantities of the iPhone X, the guidance appears to be quite good relative to expectations. Apple shares have responded, moving up another 5% to all-time highs.
The September quarter marked the fourth consecutive quarter of accelerating year-over-year revenue growth for Apple following three quarters of negative growth during the first nine months of 2016. Revenue growth reached double digits for the first time since the September quarter of 2015. The fact that growth was led by Services, Macs, and iPads is reassuring as despite what looks to be a strong launch for iPhone X it is hard to argue that iPhones are a high growth business. Upside in Services, even after adjusting for a one-time benefit, is good news as margins in this segment rival those of the iPhone.
Revenue guidance suggests 9% growth for the December quarter. If achieved or exceeded, this should support investment sentiment that Apple is growing again. The high growth days are behind the company but a consistent mid-single digit growth rate in revenues drives a powerful financial profile and double digit growth in cash flow and earnings per share. In a growth starved world, especially among large blue chip companies, investors should remain bullish on Apple. Like most analysts, we see the shares headed still higher; perhaps north of $200 as the stock earns a market P-E multiple on what could be a conservative consensus estimate for 2018 of $11.38. If iPhone X turns out to be a brisk seller that ushers in a new platform for smartphones, Apple shares offer even more upside.
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.