Apple reported a surprisingly robust quarter, beating expectations across the board.  Revenues grew 11% vs a year ago, the best growth rate in almost two years.  Margins rose modestly, which accompanied by continued share buybacks, allowed EPS to grow by 18%.  The source of strength was broad.  The small form factor, lower price iPhone SE drove iPhone sales even with stores closed around the world for much of the quarter.  Work From Home trends led to a surge in sales of Macs and iPads.  Mac revenue grew 22%, the best since 2017. iPad revenue grew 31%, the best since 2013!  Wearables and services sustained mid-to-upper teens growth as Apple continues to offer more services to a growing installed base of devices.

Management withheld formal guidance once again due to the uncertainty created by the various impacts of the COVID-19 epidemic.  Commentary provided in place of formal guidance suggests management is confident these trends will sustain through the current quarter, providing a bridge to highly anticipated 5G iPhones due to debut in October.

The next leg for Apple shares is expected to come from a super cycle for iPhones as 5G rolls out around the world supported by wireless service providers and app developers.  The average age of iPhones currently in use is several years old with a large number of users still on IPhone 6, 7, and 8.  Added speed from 5G and possible new applications is expected to be the first “must have” upgrade for iPhones in many years.  A surge in iPhone sales would support Watch and Air Pod wearables and services such as Apple Pay, Apple Store, warranties, and content subscriptions.

Investor anticipation of this cycle has driven Apple shares to all-time highs even amid a global recession.  This has been caused mostly by an expansion in the stock’s P-E multiple.  Apple shares now trade at 27 times 2021 estimated earnings.  This is really the only flaw Northlake sees in the Apple investment thesis as this multiple is the largest premium that Apple has traded at for years.  The company is executing at a high level and financial strength is unrivaled.  Share buybacks and dividend increases will continue.  We are having trouble justifying a target price any higher than current levels but on the theory that 2021/22/23 earnings estimates could move higher on the benefits of the super cycle and a long-term mix shift in favor of high-margin services, we are willing to hold Apple shares.  Given the outstanding performance, we do see it as prudent to manage position sizes so small sales of partial positions in Apple as client accounts are managed and rebalanced are likely.

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.