Apple reported strong 4Q20 earnings with headline numbers for revenue and EPS ahead of Wall Street estimates.  The stock responded by trading down -6%, however, due to the composition of revenue and a refusal to provide detailed top line guidance for the December quarter.  Revenue was up 1% vs a year ago and about 2% above consensus.  The better than expected revenue was driven by all the business lines other than iPhones.  iPhone revenues fell -21% and came in about 5% below expectations.  iPhones still dominate Apple at over 50% of trailing 12 months revenue. 

Analyzing iPhone trends during 2020 is very challenging.  COVID has impacted demand and supply.  The new iPhone 12 series that has been very well received by critics and seen high initial demand is rolling out 4 to 7 weeks later than 2019’s iPhone 11 family.  The lack of specific guidance for revenue is understandable given all the uncertainty created by COVID.  Will stores be open?  Will consumers continue to spend as virus cases escalate in the U.S. and Europe?  Demand is very strong to start.  Will Apple’s supply chain be able to meet demand?  Investors became more worried about the near-term outlook when management only gave broad comments about revenue for the December quarter.  Northlake takes solace in the fact that management still guided iPhone revenues to be up this holiday quarter even though there is substantially less selling time.  In addition, management noted that everything besides iPhones would grow at least at a double digit rate.

The problem with Apple stock since it hit an all-time high of $137 at the start of September is that it is just very expensive.  Apple just completed its 2020 fiscal year.  Earnings were $3.28 per share, up from $2.97 in FY19 but clearly depressed by COVID in FY20.  Analysts expect growth to $3.90 in FY21, a gain of 19%.  FY21 growth is juiced by expected strong demand for the new 5G-enabled iPhones, continued growth in high-margin services, share buybacks, and easy comparisons.  Based on trailing earnings, Apple shares trade at 33X earnings.  Looking ahead, the P-E ratio on FY21 estimates is 28X. 

Northlake finds these multiples high by historical measures or against long-term growth that is likely under 10% annually.  The average stock is presently trading about 22X FY21.  Apple clearly deserves a premium.  However, we see the current valuation providing a warranted premium.  A few months ago we trimmed client holdings of Apple at $126 based on valuation concerns.  The current pullback has corrected excessive valuation but leaves little room for upside.

We plan to hold current positions in Apple and continue to manage positions on a client-by-client basis.  We like the growth potential in iPhones over the next few years as 5G rolls out, finally giving people a reason to upgrade to a new phone.  Services and Wearables should continue to grow at double digit rates and have margins well above iPhones.  Apple is still a great company.  The stock just needs a rest to let the earnings catch up with the massive move up in the stock price 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.