Apple (AAPL) reported a disappointing quarter and issued guidance for the June quarter that was below expectations.  Missing the quarter on revenue and EPS is highly unusual for Apple.  There have been times in the past where guidance was considered disappointing but missing against consensus expectations on revenue and EPS is unusual.  Shipments of iPhones came in OK so the problem was in gross margins and average selling prices for iPhones.  Both of these issues have long been major fodder for Apple bears who believe that the company is over earning against a commodity product.  Guidance does not necessarily support the bears, however, as the lowered expectations appear designed to clear inventory of the mediocre selling iPhone6 and 6s ahead of the iPhone7 launch this fall.

The quarterly report and guidance suggest that the bottoming in Apple’s growth will now be pushed out the June quarter.  Northlake had expected the March quarter to mark the bottom allowing the shares to begin to rally into the iPhone7 cycle.  This no longer appears the case.  Furthermore, there are doubts about how strong the iPhone7 cycle will be given weaker than expected demand for the 6 and 6s.  Part of the issue is that U.S. telos are extending the upgrade cycle on smartphones with pricing and promotion strategies.  There also could be resistance to the latest phones now that software, which is upgradeable via download, rather than hardware, is driving consumer perceptions.

Northlake is less positive on Apple than it has been in some time.  The challenge the stock faces is that even a good iPhone7 cycle will only drive only modest, single digit growth in operating income.  Given what looks like a mature global smartphone market, it is hard to see the valuation on AAPL shares move much higher.  New estimates have the company earnings $8 this year and less than $9 next year.  Financial strength remains unrivaled providing support for the shares with buybacks and dividend increases.  AAPL increased its shareholder friendly capital allocation program as expected when it reported.

In our last update on AAPL, we noted that the shares could rise to $120, if growth resumed as we expected.  With growth now on hold for longer than we had expected, we believe upside is limited.  Support should exist in the mid $80s at 10X 2016/17 earnings.  We plan to hold AAPL for now but may look trim oversized positions as we have been doing occasionally over the past several months.

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.