Apple reported very promising results for Q3 2018 (their financial year ends in September). Factoring in the results into our model, we increased our price target from $190 to $208. However, we changed our stance from Overweight to Hold.
Given its revenue base and size, Apple's recent growth has been impressive. However, with 80% of the company's sales exposed to secularly challenged businesses, we believe the long-term growth outlook remains limited.
We continue to see support for the shares from the company's substantial share buy-back, however, with positives and negatives largely balanced at current levels.
The main highlights from Q3 2018 results
During the quarter, management has increased spending, focusing on content and emerging markets.
* iPhone pricing - iPhone revenue increased by 20% year-on-year, thanks to ongoing momentum for iPhone 8/8+ and X;
* Services and Other products - These continued to generate 30%+ growth. The company feels positive about the Services momentum, which is set to double 2016 revenue by 2020.
* Apple Music grew 50% year-on-year.
* AppleCare revenue grew at its highest rate in 15 quarters.
* Cloud services revenue up 15% year-on-year.
* Apple Pay had over 1 billion transactions during the quarter, and is entering Germany later in 2018. Apple Pay transactions last quarter exceed Square and PayPal.
* Wearables – Apple Watch, AirPods, and Beats – report outstanding results, reaching $10 billion in revenue over the last four quarters.
* China - Double-digit revenue growth in Greater China for four straight quarters;
* Cash - Apple now has $243.7 billion in cash on hand. This is $23.5 billion lower from the $267.2 billion it posted in the March quarter, when Apple announced a $100 billion buyback program and a 16% dividend increase;
* Tariffs - None of the Apple products have been directly affected by tariffs, but the company is evaluating the impact from latest round of proposed tariffs;
* iPad - iPad momentum is fading (+1% growth in units year-on year and revenue declined 6% year-on-year)
* The Mac - declined 13% ahead of product transition
* Apple Watch and AirPods - Demand for both remained strong, with wearables up 60% year-on-year.
A dividend of $0.73 per share was declared on the company’s common stock.
Share Repurchase Program
During the third quarter, the company repurchased 112.8 million shares of its common stock for $20.0 billion, in connection with two separate programs. $10.4 billion of this amount was repurchased under the previous share repurchase program of $210 billion, and thus completing the program. The remaining $9.6 billion was in connection to the new share repurchase program of up to $100 billion, announced in 1st May 2018.
* Revenue between $60 billion and $62 billion.
* Gross margin with the 38-38.5% range.
* Operating expenses not exceeding the $8.05 billion mark.
Our $208 12-month price target factors in a discount rate of 10% and a forward Price-to-earnings multiple of 17x.
We are forecasting gross margins of 38% in 2019 and 2020. Our model also reflects an income tax rate of 15% going forward.
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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