Apple reported December quarter results in line with recently lowered Wall Street expectations.  A much greater focus for investors was guidance for the current quarter.  Apple released guidance that was below Wall Street analyst estimates but similar to the much lower expectations held by large investors like hedge funds and mutual funds.  It is not unusual for investors and analysts to have different estimates.  Perhaps the bigger news was that management spoke very cautiously about the global macroeconomic environment and the pressure it was placing on Apple.  We do not recall Apple ever making similar comments.  Management noted pressures in all regions, including Hong Kong and China.  Apple shares are trading down about 5% following the report and Northlake believes it is the cautious macro commentary, especially in China, that is providing the bulk of the pressure.

Apple shares have been under pressure for about six months as investors began seeing that 2016 was going to be a no growth year for the company.  The growth challenge is coming from multiple sources including (1) the massive success of iPhone6 which offered widely demanded larger screens that likely pulled forward demand from iPhone6s, (2) foreign currency translation pressures, and (3) the macroeconomic weakness noted previously.

The next growth catalyst is iPhone7 that is due to be released in late fall.  Historically, the full number upgrades have triggered accelerated growth over the “s” versions.  This should be the case again with a boost from the fact that only 40% of iPhone5s or earlier owners have upgraded to the larger screen phones.  Apple also continues to gain share vs. Android at the high end with switchers reaching records in the latest quarter.  Northlake sees renewed growth for iPhones coming this fall but the growth rate is unlikely to be high given there does not seem be a killer upgrade coming similar to the larger screens from iPhone6.

Hope for renewed growth in the fall and what we expect to be a material increase in Apple’s share buyback and dividend to be announced in April should provide support for Apple shares near current levels now that expectations have been lowered.  Of course, the path of the global economy and stock market matters as well.

Apple shares are now trading at 10x 2016 earnings without given credit for almost $28 in net cash held by the company.  This valuation is similar to the bottom seen in other tech leaders that saw their growth rate stall including Microsoft, Cisco Systems, and Intel.  Given Apple’s unique financial strength, a growing installed based that is driving over 20% growth in services revenue (Apple Pay, iCloud, Apple Music, Apple Store), and the prospect for renewed growth later this year, we think Apple is worth holding.  Should the skies clear as we expect, Apple shares could easily return to $120 or better providing substantial upside.  We do not see a lot of downside here other than macro related.  As a result, while it may take patience, the prudent choice is to hold Apple shares.

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.