Apple reported better than expected 2Q20 earnings albeit after the company announced new guidance as COVID disruption closed the company’s stores in China, the U.S. and the rest of the world.  The company did not provide its usual detailed guidance for the quarter ahead but did provide some big picture comments.  iPhones and wearables will continue to face pressure as stores are mostly closed outside of China.  The company continues to sell online and the recent introduction of a smaller iPhone SE appears to be selling well.  iPads and Macs have had a sales boost driven by stay at home and work from home.  The company’s installed base of devices continues to grow, supporting Services revenues.  In the trailing twelve months, Apple’s Services business represented almost 17% of company revenues.  Services gross margins are around 65% vs the company average of 38%.  Services have also received a boost from work and stay at home thanks to Apple Arcade, Apple TV+, and Apple Music subscriptions.

As it does each April, Apple provided an update on its capital allocation plan.  The company announced a dividend increase and a $50 billion boost to its share repurchase authorization.  The company’s plan continues to be to reduce the excess cash on its balance sheet and use free cash flow to pay higher dividends and repurchase additional shares.

When we wrote our last update on Apple three months ago, the stock was trading at $324, very close to its all-time high.  At that time, we noted that we thought the risk-reward profile on the shares was balanced.  We also noted that the company’s financial strength and long-term potential from services and a 5G iPhone cycle supported continuing to hold Apple shares.

These same factors have allowed Apple shares to hold up fairly well in the last six weeks, down only about -10%.  The outlook is very muddled at the moment with no clear plans on when stores will reopen and if the holiday season will see normal demand.  Most importantly is whether there will be any delay to the highly anticipated new 5G iPhones.  The company normally introduces its new phones in September and starts shipping by early October.  Press and analyst reports suggest that a one month delay is possible.  A longer delay or reduced demand related to recessionary conditions is a definite risk for Apple shares over the next few months.

The risk to the 2020 iPhone cycle is balanced by Apple’s financial strength, the company’s growing Services business, and the work and at stay at home boost for iPads and Macs.  Northlake still thinks Apple shares are worth holding for the long-term but there is little change to our view that the risk-reward is balanced in the short-term.  From the current stock price around $290, we see up or down 10% as a trading range until more clarity exists for store reopenings, timing of the 5G iPhone cycle, and the impact of the recession on consumer demand.

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.