Apple (AAPL) reported in line 3Q19 results and released guidance for 3Q19 that is ahead of expectations.  It is worth noting that revenues grew just 1% vs the year ago quarter and operating income fell -8.5%.  Guidance calls for similar growth rates next quarter.  The stock is trading up about 4% to its highest level in 2019 and since the downturn off last fall’s all-time highs.  The narrative around AAPL has changed mightily given the stock can act well even ex-growth in the overall business.  Investors now accept that the iPhone is no longer a growth business but services and wearables related the massive installed base of iPhones, iPads, and Macs can sustain superior returns for shareholders.  This is primarily due the huge free cash flow the company generates and a disciplined capital allocation strategy that returns the cash to shareholders via dividends and buybacks.  Northlake believes the stock can continue to work under this investment thesis until iPhone picks up again with a replacement cycle when 5G becomes the global wireless industry standard.  5G phones should begin to sell in material amounts in late 2020.

The stock is trading up primarily due to the very positive tone of the conference call and surprisingly robust guidance.  Guidance implies above historical sequential growth from 3Q to 4Q.  In the press release, Tim is quoted saying “major launches on all of our platforms, new services, and several new products” are coming in the September quarter.  Last year the 2Q19 press release noted only that “we are excited about the products and services in our pipeline.”  This incremental confidence is boosting the stock today as it gives confidence in the near-term which provides a bridge to the 5G upgrade cycle.

The tone of the conference call was good as management noted several items that may have understated growth in the quarter.  Foreign exchange took a larger than expected 3% off revenue growth.  China improved, although still down year over year.  IPhone inventories came down.  iPhone sales improved in June especially at Apple’s stores on online at Apple.com.  Services grew below expectations but adjusted for foreign currency and a one-time benefit a year ago sustained the upper teens growth rate of recent quarters.  Management spent considerable time reviewing growth opportunities in services and wearables.  These businesses represented 32% of revenues in the quarter with wearables (Watch and Airpods) especially strong, up 48%.

The recovery in AAPL shares off about $150 at the start of 2019 leaves less upside in the near-term.  However, looking ahead to 2020 continued growth in services and wearables and the prospects for renewed iPhone growth should allow the shares to regain their all-time high around $240 over the next six to twelve months.  Given AAPL’s financial strength and consistency, that is enough for Northlake to continue to hold AAPL.

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.