Apple reported an extremely good December quarter to open the company’s 2021 fiscal year.  Strength was across the board in all products, services, and geographies.  The results materially exceeded high expectations.  Northlake sees two key long-term takeaways from the results.  First, the iPhone remains healthy and is poised for several years of growth as 5G wireless networks roll out globally and a huge installed base of older iPhones upgrades to the iPhone 12 family and beyond.  Apple also continues to gain market share in mobile phones with a significant number of iPhone 12 buyers new to Apple.  Second, the flywheel of services, wearables, and accessories off the installed base offers a huge high-margin opportunity even as iPhone sales moderate beyond the 5G upgrade cycle.

Despite the great results, Apple shares are trading down over 2% the morning after the report in a strong tape.  There are a couple of things to consider.  Yesterday, when the market had its worst day in several months, Apple was unchanged.  In addition, since Thanksgiving, Apple shares had risen from $112 to new all-time highs over $140.  It is often said that the stock market discounts the future. For today, Apple’s great recent stock performance means that the market had already discounted the great results.

Apple shares now trade at 32 times 2021 estimated earnings and 29 times 2022 estimated earnings.  The stock market multiple is about 21 and 18 times 2021 and 2022, respectively.  Apple clearly deserves a premium given its historical track record, disciplined financial management, shareholder-friendly capital allocation, and long-term growth opportunity.  Long-term growth at Apple post the 5G upgrade cycle seems like it should be in the mid-single digits and above global GDP growth. 

Northlake sees Apple shares as fairly valued presently.  Given the company’s quality and the potential that (1) current estimates prove too low, and (2) opportunity exists in new areas such as automated vehicles, fairly valued is good enough.  The stock may consolidate recent gains, allowing valuation to catch up and the 5G cycle and flywheel to prove themselves.  A trading range of $120-150 for the next few months is our most likely scenario.

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.