Apple (AAPL) reported weak but better than expected 2Q19 results and 3Q19 guidance.  Revenues fell -5% for the second consecutive quarter.  Operating profit fell -15% after declining -10% last quarter.  EPS exceeded expectations but still declined -10% boosted by additional share repurchases.  Net income fell -16%.  Guess what?  Amid all these negative numbers AAPL shares popped 5% after the news.

The primary reason for the positive reaction is revenue guidance that indicates the company will return to growth in the June quarter.  In addition, gross margins held up fairly well despite price cuts to stimulate iPhone demand in China, India, and other emerging markets.  Management indicated the strategy is working as iPhone demand has steadily improved since December.  China revenue was down only -21% this quarter, an improvement from -27% last quarter.  Sometimes less bad can be good on Wall Street.  For Apple, this is definitely the case for 2Q19.

iPhones are getting less worse and Services and Wearables, two high growth, high margin businesses, continue to perform well.  Together these businesses are up to 25% of total revenue in the most recent quarter.  Wearables have sustained 30-40% growth six consecutive quarters.  Services growth has slowed but remains in the range of 15-20% for the last two quarters.  Gross margin in Services is high and growing at over 63% in the latest quarter, up more than 200 basis points.  iPads are growing again, up 17% in 1Q19 and 22% in 2Q19.

For AAPL shares to really soar from here after the recovery from a low of $142 in December to $210 after hours yesterday, iPhone sales are going to have to start growing again.  That is a difficult task given the still lengthening replacement cycles in the company’s largest markets in the U.S and Europe.  Perhaps if 5G takes off, a replacement cycle will ensue.  There are hundreds of millions of older iPhones still in use.

AAPL stock can continue to work modestly higher with just less bad iPhone sales and according to management that is the case thanks to price cuts in China and aggressive Apple-led trade in policies.  Services, Wearables, and iPads are growing at 20% combined and represent 1/3^rd of sales.  The company’s financial strength remains superb with over $26 per share net cash on the balance sheet, a new 5% dividend increase, and a new $75 billion share buyback equivalent to about 8% of outstanding shares.

The stock trades at about 19 times 2019 earnings.  It is neither cheap nor expensive.  2Q19 results and 3Q19 guidance suggest earnings could grow to north of $13 in 2020…if iPhones stabilize.  As long as the street has confidence in the current consensus, the shares can work back toward new all-time highs at $233, up another 10%.  However, a really big gain requires improved iPhone results and any hiccup in the Services and Wearables business will be harshly received.  Northlake is sticking with AAPL but not without some concerns.

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.