Apple (AAPL) reported slightly disappointing earnings relative to very high expectations.  iPhone shipments of 47.5 million fell a little short of 50 million plus expectations and while the company did not breakout Watch sales,  it is easy to infer a range of 2-3 million, short of the 3-4 million  consensus.  Guidance for the September quarter also fell a bit below investor hopes, especially on the top line.  Management guided to $49-$51 billion in revenues with the street sitting just about $51 billion.  There were clear positives in the quarter including better than expected average selling prices for the iPhone, acceleration in the already massive share buyback, and growth of 100% in revenues in China.  Also not to be lost is 33% revenue growth and 44% growth in earnings per share.  It was not that long ago that Apple was producing negative earnings growth and investors worried that the company had peaked.  The larger screen iPhone 6 changed all that.

The new worry for Apple is that iPhone 6 cannot be topped and growth will again disappear.  The slight shortfall versus expectations in the latest report stoked those fears and Apple shares are selling off by 5-7% this morning.  Northlake believes Apple can slightly top the massive iPhone shipments from last holiday season but growth will definitely slow, likely to less than 10%.  Many analysts disagree and think shipments could fall on a year-over-year basis for the first time ever.

The coming growth slowdown is well understood by investors.  The hope is that Watch sales and emerging service business at ApplePay and Apple Music will help the company sustain consistent double digit growth.  The service businesses are very high margin, which along with what looks an improving margin file for iPhones (driven by higher ASPs and cycle driven economies of scale), should set up Apple to sustain long-term growth.

However, Northlake sees the next couple of quarters as transitional for Apple.  Investors will want proof that iPhone can still grow and the newer businesses will become material.  The only answer to these concerns will be reported earnings and it will take both the current quarter and the crucial, seasonally strong holiday quarter to prove the growth story remains intact.  The shares are not expensive at less than 14 times this year’s earnings. Along with the share buyback and healthy dividend, this should provide support for the stock in the $115-125 range.  Northlake plans to be patient and hold Apple shares even with limited near-term upside.  We remain believers in the long-term growth story and think that expectations have been reset.  An upside surprise in the next quarterly report is quite possible.

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.