Northlake clients have owned Apple (AAPL) since early 2005, a period now covering over 40 quarterly earnings reports and conference calls.  The most recent report and quarter ahead guidance issued earlier this week was the closest match to Wall Street estimates so far.  Granted when Tim Cook took over as CEO, the company changed its methodology to more accurately provide guidance and stop the game of guiding conservatively and producing upside “surprises.”  What makes this quarter interesting is that typically AAPL needs to “beat and raise” when it reports to cause an immediate upward move in the stock.  This quarter a merely inline report and guidance has allowed the stock to move up 5% in two days.

The reaction to this quarter shows just how poor the sentiment has gotten toward AAPL over the past few months as the company faces the formidable challenge of growing revenue and earnings against the monster success of the iPhone 6 cycle.  iPhone 6 introduced larger screen phones, kicking off an upgrade cycle among current iPhone users and new users switching from Android phones.  iPhone 6 set very difficult comparisons for AAPL and many investors fear it represented that last major growth phase for the company.  Recent product introductions like Apple Pay, Apple TV, and Apple Watch have proven moderately successful but not nearly large enough to drive growth for the company.  Macs chug along but in a mobile world traditional PC and laptop forms are mature products.  iPads and tablets in general have fallen off much more rapidly than expected not yet shown signs of stabilization.

Thus, iPhones remain the key driver of AAPL growth and stock price.  Recent datapoints from suppliers to AAPL suggested that iPhone 6s was producing disappointing unit sales and the company could see its first ever year over year decline in iPhone unit volumes this quarter against the huge holiday season last year.  However, AAPL’s guidance implied higher unit volumes, albeit only low single digit growth.  Against the cautious sentiment dominating AAPL since the stock peaked at $135 earlier, that was good enough for a relief rally.

Northlake sees the current outlook for AAPL as fairly balanced.  We share some of the growth concerns.  In particular, we have a hard time seeing the company grow net income beyond the upper single digits over the next year or two.  This is mostly just a law of large numbers challenge.  We do not share the bearish view of declining iPhone volumes in FY16.  Only about 30% of the installed base of iPhone users has upgraded to the iPhone 6 series and growth in emerging markets, China especially, appears to be sustainable.

A modest growth outlook is well reflected in AAPL shares which trade at just 12X 2016 earnings estimates ignoring about $25 per share in net cash on the balance sheet.  We see valuation providing good downside support and still negative sentiment giving way over the next three months as expectations for iPhone unit volumes firm.  While we are less enthusiastic about big upside in the stock in the near future, we see a move to the 2015 highs as likely.  That is enough for us to continue to hold the shares for Northlake clients and be patient for non-iPhone growth drivers to kick in.

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.  AAPL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.