Apple Shows Signs Of Recovery From Coronavirus, Doesn't Shake Bulls With Lack Of Guidance

Apple Inc.'s AAPL fiscal second-quarter results bolstered hopes for a coronavirus recovery.

Despite supply chain disruption, store shutdowns and declines in demand, the company’s $58.3 billion revenue and $2.55 bottom line beat first-quarter forecasts of $54.8 billion and $2.24, respectively. Apple’s 1% year-over-year revenue growth reflected 17% growth in the Services segment, 23.5% growth in wearables and record sales for Apple Retail — all offset by declines in iPhone (7%), iPad (11%) and Mac (3%) sales.

Gross margins widened to 38.4%, reflecting a 1.6-point expansion of Services margins and 0.9-point contraction of Hardware margins.

“Retail demand remained strong in C1Q as higher online sales offset lower demand from store closures and pent up demand kicks in as economies reopen,” Bank of America analysts led by Wamsi Mohan wrote in a note.

See Also: Apple Has 'Better Days Ahead,' Analysts Say After Q1 Earnings Beat

Dividends & Buybacks

Apple raised its dividend 6.5% and authorized an additional $50 billion buyback, but some were disappointed by the latter rate.

“The re-upped share repo authorization was lower than prior years, but a touch of austerity in the current environment has been the across the board trend – and given what remains from the prior plan, repo activity should not come down a whole lot,” UBS analyst Timothy Arcuri wrote.

Apple Services & Hardware

Services margins struck an all-time high at 65.4%, with paying subscribers rising 32% year-over-year. Analysts consider the segment critical to Apple’s story.

“Services revenues increases AAPL's ecosystem value in 3 ways (our view): a) it makes iOS stickier, which lowers churn; b) adds revenue per user which increases lifetime value; and c) it super-charges AAPL's margins,” Needham analyst Laura Martin wrote.

Bank of America reflected on Apple’s capacity to capture additional Services revenue through growth in active installed devices — a point Wells Fargo affirms.

“We continue to believe Apple’s ability to monetize its installed base and drive paid subscriber expansion will support a sustainably higher valuation multiple,” Wells Fargo analyst Aaron Rakers wrote.

Services success aside, UBS was disappointed by a 90-basis point decline in product margins.

“While we are still modeling slippage from CQ3 into CQ4 and CQ4 into CQ1:20, the story here is still about a new iPhone with just enough ‘new’ to drive a very strong 2021 and a multiple that is supported by services now being about 40% of GP dollars,” Arcuri wrote.

Near-Term Coronavirus Impact

Oppenheimer is watching to determine whether Apple profits from a new work-from-home culture and demand for remote connectivity, or whether it suffers a decline in sales related to high unemployment. Raymond James suspects online education and remote work to heighten the need for high-margin devices.

“We do expect June demand to be impacted, but we think better Mac and iPad will help to offset slower iPhone and wearables,” analyst Chris Caso wrote.

CEO Tim Cook declined to provide guidance but predicted a $1.5 billion forex headwind, a decline in year-over-year iPhones and wearables growth, acceleration in Mac and iPad growth, and an increase in Services.

Given these factors, Bank of America expects second-half revenue to drop 2% year-over-year — which it says isn’t bad compared to peers with discretionary goods.

iPhone Launch

Raymond James expects the timing of the 5G iPhone launch to drive a weak third quarter but stronger fourth. The analysts anticipate a 10% year-over-year decline in unit sales for the new phone, with volume and related high-teens revenue growth pushed into 2021.

“Our optimism for the stock is about 2021,” Caso wrote. “We think upgrades to 5G are inevitable, and those who don’t buy a phone this year will have a strong incentive to buy one next year, particularly with more complete 5G networks and our belief of a stronger 2021 iPhone feature set. Net, we think COVID delays rather than destroys demand for the 5G iPhone.”

Big Picture

In general, the Street maintained a positive view of Apple.

“We are confident in sustainable long-term growth in light of 1) stretched iPhone replacement cycle and the upcoming 5G iPhone launch, 2) upside to Services revenue per user relative to peers, and 3) Apple's strong balance sheet that allows for innovation investments and share repurchases during even a prolonged downturn,” according to Morgan Stanley's Katy Huberty.

See Also: Apple Increased Smartphone Market Share In China In Q1 During Pandemic

The Apple Ratings

The lack of guidance may give some investors pause, though. “Even with all the good news, the withdrawal of forwarding FY 2020 guidance may lead to near-term weakness in the stock,” said Tigress Financial analyst Ivan Feinseth.

Only one Street rating seems to necessarily reflect that hesitance.

“Apple’s fortress of a balance sheet provides significant flexibility in the downturn (both operationally and strategically) and stands as a key differentiator versus peers,” Credit Suisse analyst Matthew Cabral wrote. “That said, we expect lingering macro pressure to weigh on iPhone replacement cycles, even with the addition of 5G (CSe C4Q launch), that doesn’t seem to be embedded in the current valuation.”

• Bank of America maintained a Buy rating and raised its price target from $310 to $320;
• CFRA maintained a Buy rating;
• Credit Suisse maintained a Neutral rating and a $260 target;
• Deutsche Bank maintained a Buy rating and raised its target from $285 to $305;
• Morgan Stanley maintained an Overweight rating and raised its target from $298 to $326;
• Needham maintained a Buy rating and a $350 target;
• Oppenheimer maintained an Outperform rating and a $320 target;
• Raymond James maintained an Outperform rating and raised its target from $305 to $340;
• UBS maintained a Buy rating and raised its target from $290 to $325; and
• Wells Fargo maintained an Overweight rating and $315 target.

Not only are analysts not giving up on Apple, but they're reiterating their confidence in the stock as best in class. “With increased confidence in the 5G iPhone launch and stretched iPhone replacement cycles, Apple remains top pick,” Huberty wrote.

Deutsche Bank's Jeriel Ong agreed: “Long-term, we continue to believe that AAPL is the best name to own in the IT Hardware landscape."

Apple's stock traded around $295.45 at time of publication.