Once again Apple (AAPL) reported an outstanding quarter, easily beating consensus estimates that were modestly above the guidance provided three months ago.  When we last wrote about Apple, we noted how consistent the company’s financial performance was and how we could almost just repost the prior quarter’s blog.  Well, how about this:

“In 2Q21 3Q21, AAPL once again easily exceeded estimates with strength across all products and geographies.  The quarter reinforces our belief that the 5G iPhone cycle will play out over several years even as much of Wall Street is still thinking about a 2021 super cycle.  Also reinforced is the idea that the iPhone has become a flywheel off which Apple can sell new products and services.  Services are now 19% 21% of revenue, and Wearables have grown to 9% 11% even in a quarter where the dominant iPhone segment is producing huge results at the start of a product cycle.  The flywheel is providing another boost as Services offer superior margins.  Although not detailed, Wearables likely provide above average margins as well.  2Q21 3Q21 saw the highest gross margin in nine years and the highest operating margin in five years.”

Apple even cautioned again on revenue growth noting that it expected “very strong double-digit growth” but less than the 36% rate in 2Q21 due foreign exchange, a return to 20% normal growth in services, and greater supply chain constraints for iPhone.  If you are wondering why Apple shares are down today after another massive across the board earnings beat, it is due to the fact that supply chain issues (e.g. component shortages) might now be impacting Apple’s most important product line.

Northlake has little concern about a possible modest shortfall in iPhone sales in the September quarter.  As we noted last quarter, we expect the current iPhone cycle to extend for several years as current iPhone users upgrade to 5G phones.  We also expect the company to continue gain switchers from Android.  The installed base of phones, iPads, and Macs running common iOS-based software will continue to grow, in turn driving more sales of high-margin services and wearables.

Apple shares have lagged the market this year but did catch up a little since the 2Q21 earnings report in April.  Company fundamentals remain outstanding, arguably as good as they have even been.  The stock’s valuation has mostly reflected the good news in 2021 with the P-E being elevated in the upper-20s to begin the year.  With back-to-back blow out quarters, earnings estimates have gone up materially and the shares now trade at 24 times 2022 consensus estimates.  We still do not see that as cheap, but upside to $155-160 now seems achievable.  We may trim massively overweight positions in Apple in client accounts (while keeping a close eye on capital gains taxes) but we are comfortable continuing to hold the shares.

The most important thing we are keeping our eye on is the growth rate in 2022 and 2023.  While we see the extended 5G cycle and flywheel off the installed base as driving earnings growth, the rate of gains should slow considerably.  Comparisons get much tougher and Apple has probably had some one-time benefits from the pandemic-driven acceleration in the digital economy.  As long as we do not see a secular challenge to the growth thesis, we will sit tight as owners of Apple for Northlake clients.

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.