Apple (AAPL) reported excellent 1Q22 results to wrap its CY21.  Revenues, profit margins, and EPS all exceeded estimates.  Guidance for the March 2022 quarter was also better than expected.  Importantly, these results were achieved without much improvement in the supply chain issues that the company is facing.  Revenue was held back by the $6 billion management had suggested three months ago, indicating that the upside in the current quarter came from demand for the company’s products.  Guidance for the March quarter suggests a similar set up.  The iPhone 13 cycle is clearly going well with upside still evident as 5G phones remain only moderately penetrated into the installed base. 

Stock Reaction:  AAPL shares are up over 7% following the report, easily outperforming a 2% gain for the broad market.  The shares are still down about $13 from the all-time high reached at the start of 2022, but this decline of 7% is far better the drop in the major averages and the pummeling in many other stocks.

Earnings Analysis:  Besides the top line, demand-driven beat, a few other things stand out.  First, profit margins exceeded estimates led by gross margins in products and services.  In products, this implies that consumers are buying the top-of-the-line products, another indication of a strong iPhone cycle.  Services margins also are holding up perhaps meaning that the fear that newer services like Apple TV+ operate at lower margins than the App Store and payments from Google for Safari search access are overblown.  Second, services growth held at over 20% despite an anticipated deceleration.  Continued growth in the installed base of iPhones, iPads, and Macs is driving a flywheel effect and remains an underappreciated part of the AAPL investment thesis.  Finally, guidance calls for more of the same with the caveat that operating expenses will rise faster than sales.  Fortunately, the gross margin expansion looks to continue and underwrites the higher spending.

Target Price:  Based on increased earnings estimates for 2022, we are raising our target on Apple to $165, or a P-E of 25 times.  The market P-E has contracted during the current correction but we are willing to underwrite a higher premium for Apple shares as the company is seeing fantastic demand and sustained flywheel impacts amid a still immature iPhone upgrade cycle.  AAPL shares are trading just above our target price but we remain comfortable holding the shares given the quality of growth, management, and the balance sheet.  Furthermore, if growth continues into FY23, we can see a stock price approaching $200 later this year.

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.