Apple (AAPL) reported a beat and raise quarter affirming that the iPhone 11 cycle is proceeding better than expected.  The report also contained good news with above consensus growth in Wearables and Services.  Apple shares had discounted this good news, rising from a low of $170 in June to over $240 ahead of the report.  Consequently, we do not expect a big positive reaction in AAPL in the near-term but feel the setup is improved for further gains as investor focus shifts to the 2020 iPhone cycle.

While we are glad to see a good reception to iPhone 11 after relatively weak iPhone demand over the past couple of years, we think the most notable part of the latest quarter and fiscal year is the continued high growth of the wearable and services businesses.  Wearables grew 54% year-over-year in the September quarter and Services were up 18%.  Both growth rates were higher than in recent quarters.  Together these line items represented 27% of Apple’s 2019 fiscal year revenue, up from 21% from the year prior.  The majority of Apple’s revenue still comes from iPhone sales.

Key to AAPL long-term performance is for the Services and Wearables businesses to drive growth as the iPhone business is mature.  If Services and Wearables can sustain 20% growth, they can contribute 5% to the overall corporate growth rate.  With iPhone 11 selling better than expected and the next iPhone cycle revolving around the upgrade to 5G networks, iPhone revenues should be in positive territory for the next 18 months.  This will allow the iPhone user base to grow moderately supporting sustained strong growth for Wearables and Services.

Apple shares are no longer cheap at 19X 2020 estimated earnings.  Thus, we now consider the stock to be more of a core holding than undervalued.  With sustained momentum across the company’s products and services, a still massive cash hoard, and continuing buybacks and dividend growth, we feel the shares can work a little higher.

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.