Apple (AAPL) reported decent September quarter results with revenues and EPS slightly ahead of estimates.  iPhone shipments came in about 1% under street estimates but were offset by better than expected average selling prices.  Services, which had been surprising to the upside and driving an improved growth narrative for AAPL, saw revenue come in about 2% lower than expected.

The small misses in iPhone units and services revenue were immediately troublesome for AAPL shares but the real story that has led to sharp downside in the shares since the report was weaker than expected guidance and the company’s announcement that it would no longer report unit volumes for its products.  Investors always view less disclosure as a sign of weakness – the company has something to hide – and when combined with the somewhat soft December quarter guidance that conclusion was easy to draw.

Management’s cautious commentary was reinforced in recent days when a leading supplier of critical components for the Face ID module slashed its December quarter revenue guidance.  The scale of the reduction suggests demand for the new lineup of iPhones may be below even the cautious guidance provided by management.

This comes as a surprise to us and most investors as the steady demand since the introduction of Face ID in 2017 suggested the large installed base of older iPhones, iPhone 7 and below, would begin to transition with the broader lineup of Face ID enabled phones introduced this year.  On the conference call, management suggested weakness in emerging markets, in particular China and India, is the primary culprit.  China is a very important market for AAPL.

AAPL’s change in disclosure appears designed to focus investors on the idea that the company represents a massive ecosystem of users, mostly iPhone but all iPad and Mac that now use a more or less common operating system and purchase products and services.  This makes the company look more like Google or Facebook or Netflix and less like a hardware company given the very high margins on incremental hardware sales and especially services – downloaded apps, Apple Music, Apple Pay, iCloud storage.

Northlake has long subscribed to this view of AAPL, so while disappointed in the recent stock price action and surprised by thus far slow demand for the new iPhone lineup, we remain confident in the long-term investment thesis.  AAPL shares are not expensive at just over 14 times 2019 earnings estimates without giving the company credit for it still hefty net cash balance of over $27 per share and prodigious production of free cash flow.  Northlake maintains its positive outlook for AAPL shares and plans to continue to hold.

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.