Apple (AAPL) reported another strong quarter driven by the incredible success of iPhone6 and 6 Plus.  Not that long ago, the debate surrounding the iPhone was whether Apple needed a lower end phone to sell in emerging markets.  Apparently, the missing ingredient was larger screen sizes.  AAPL sold 61.5 million iPhones in the March quarter, easily exceeding consensus estimates for 56 million.  Furthermore, growth was driven by China +71%) and emerging market in general.  Strength in iPhones led better than expected gross margins and earnings per share.

Despite the beat to consensus expectations and another big boost to the company’s share buyback program and dividend, AAPL shares lost a little ground the day after the earnings report.  We think the pause will prove temporary and have adjusted our target higher to $155, up 20% from current trading levels, based on 15x the average of 2015 and 2016 earnings estimates plus half of the company’s net cash per share.

Away from iPhone, Macs had solid growth, with units and revenue up 10%.  Newly aligned Services and Other Products saw 12% growth.  These segments include iTunes, Apple Pay, Beats, AppleTV, and soon the Apple Watch.  The on soft spot was iPad sales which saw a 23% drop in unit sales vs. a year ago.  iPad sales have now fallen five consecutive quarters.

Guidance for the June quarter matched Wall Street estimates almost exactly.  One item of interest and some controversy was management’s comment that Apple Watch gross margins would be below the corporate average during the June quarter.  Given the very high margins on high end watches generally, this came as somewhat of a surprise.  Coupled with non-specific comments about initial Apple Watch demand, we sense that investor expectations for the initial ramp of Apple Watch may have been reduced.

The massive success of the iPhone6 product cycle definitely gives Apple tough comparisons looking ahead to fiscal year 2016.  A slower ramp in Apple Watch, particularly if that is the case this coming holiday season, takes away one lever to sustain growth.  We doubt Apple management has changed its assessment of the watch at all but maybe Wall Street expectations were a bit too high.

One bullish item emerging on the conference call was when CEO Tim Cook stated that just 20% of the installed base of iPhones had upgraded to iPhone 6.  This suggests plenty of firepower to remains to drive iPhone unit volumes over the next several quarters.  It also suggests that firs time iPhone buyers and switchers from Android have been material.  With future growth hoping to emanate increasingly from services like apps, Apple Pay, an OTT TV service, or Beats streaming music, building the networked platform is important for the Apple bull case.

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.