While reviewing Apple’s (AAPL) 2Q21 earnings report, I mentioned to Tim that I could almost just repost the blog reviewing 1Q21 earnings.  Just change the date and tweak it here and there.  Tim astutely pointed out that consistency is a sign of a great company; it is also especially valuable in an era when tweets or comments by management change investor perceptions and cause historically unusual stock volatility.

In 2Q21, AAPL once again easily exceeded estimates with strength across all products and geographies.  The quarter reinforces our belief that the 5G iPhone cycle will play out over several years even as much of Wall Street is still thinking about a 2021 super cycle.  Also reinforced is the idea that the iPhone has become a flywheel off of which Apple can sell new products and services.  Services are now 19% of revenue, and Wearables have grown to 9% even in a quarter where the dominant iPhone segment is producing huge results at the start of a product cycle.  The flywheel is providing another boost as Services offer superior margins.  Although not detailed, Wearables likely provide above average margins as well.  2Q21 saw the highest gross margin in nine years and the highest operating margin in five years.

If we had to point to one new takeaway, it would be the idea that the new post-pandemic normal might place a premium on high-performance devices (phones, laptops, PCs, tablets) as new digital habits have formed and a hybrid workplace including “work-from-home” emerges.  This concept would play to AAPL’s strengths as a premium products company.  A great response to new Macs and iPads that contain the company’s internally designed high-end processor is one sign that a new normal could be developing to AAPL’s advantage.  A shift toward premium devices could also be evident in the mix shift in favor of the iPhone12 Pro.  Mix shifts up the product chain further support margin expansion.

Beyond AAPL’s current business momentum, the company’s financial strength remains outstanding.  To the Board’s great credit, capital allocation remains very shareholder friendly as evidenced by another dividend increase and new $90B share buyback program.  In the past nine years, AAPL has reduced its shares outstanding from about 6.6 billion to 4.2 billion.  Even so, the company still has about $90 billion in cash net of debt and free cash flow nearing $100 billion a year and remains committed to moving to net cash and debt of zero.

As we noted last quarter, we find AAPL shares fairly valued.  The stock has moved sideways so far in 2021 and lagged the market despite announcing two outstanding earnings reports.  Earnings estimates are rising again, which along with the lack of movement in the stock has compressed the P-E ratio.  The shares now trade at 23X 2022 earnings down from 29 times at our last update three months ago.  Given current market multiples, we think AAPL shares should trade at least at 25X 2022 earnings estimates.  This would target a stock in the low $140s, providing only modest upside. 

This math plus some cautious comments about revenue in the current quarter due to component shortages and timing of the iPhone12 cycle is causing the shares to trade flat despite the latest big earnings beat.  We still believe a trading range of $120-150 is likely but are very happy to continue to hold AAPL shares given the company’s overall quality and long-term growth opportunities.

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.