Will Apple Beat Its Guidance?

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About: Apple Inc. (AAPL)
by: Edward Ambrose
Summary

Apple has sold fewer iPhones, which generate 66% of revenue than it expected in the holiday quarter.

The mix of iPhone models produced higher revenue per phone.

Apple can lose a surprisingly large volume of iPhone units and still make its guidance. It is a strong buy.

Apple Stock Price

Apple (NASDAQ:AAPL) was very conservative in its projection for the holiday quarter, so it is likely to make the guidance and has the possibility of exceeding quarterly guidance of higher end models has partially offset the lower volume. This performance should lead to a recovery in the depressed stock price. It is a strong buy.

Mix

A survey by Consumer Intelligence Research Partners demonstrates the popularity of the XR, at $749, which accounted for 32% of sales. On this chart, the newer products are on the right. The next most popular iPhone is the XS Max at $1,099. This is followed by the XS at $999. The older 7 and 8 models made up 33% of sales. In these versions, the Max models were popular.

Source: Consumer Intelligence Research Partners

Holiday Jump

Apple's fiscal year end in September, so the first quarter of fiscal 2019 ends in January. Purchases of iPhones jump in the fourth quarter. These iPhones are bought as gifts or the customers buy it for themselves to deduct as a business expense.

The table below illustrates the jump from the third quarter in revenue and units. In the fourth quarter of fiscal 2017, revenue was $28.8 billion. In the first quarter of 2018 (Christmas of 2017), revenue jumped 114% to $61.6 billion. The jump gets bigger as the iPhone introduction moves into the holiday quarter.

The revenue per iPhone also increases in the holiday quarter, by an average of 15%. In the last quarter of fiscal 2018, the revenue per unit grew to $793, much to the surprise of the analysts. This piece of good news helps offset the slide in the unit volume of sales. Apple's revenue boost at Christmas 2017 was driven by higher revenue per unit.

The average unit growth over the last three holidays is 64%. To meet the upper bound of guidance growth of 58% or 3 million fewer units would be needed. To get to the lower level of guidance, 7 million fewer units would be needed. To put this in perspective, total iPhone sales in fiscal 2018 were 218 million.

Apple Guidance

The total Apple revenue and profit in the guidance is illustrated below. All of the other businesses were assumed to jump 10% in the holiday quarter. With the new iWatch, iPad, computers, and services, this could turn out to be excessively conservative.

Production Cutbacks

Analysts have watched the production cutbacks in the Apple supply chain. The latest is Citi, which lowered its production forecast for the second quarter of fiscal 2019 by 8 million units. Last year, the second quarter iPhone sales were 50 million units.

The question that cannot be answered is, what was the production rate originally planned for the first quarter. With the growth seen last year, that could be at around 80 million units. This would require large cuts and still leave them with excess inventory. The pessimism might be overdone.

Future Apple Actions

Apple iPhone sales are lower than anticipated. It needs to revise its approach. It spends $14 billion on product development. The market for smartphones declined 6% in the last quarter of Apple's 2018 fiscal year. They plan to expand in health and services. The weakness in the smartphone creates a need to accelerate these efforts, which may be hard to do.

Apple's continual improvement and movement toward the upper end of the market have worked well, but it has limits. The 5G adoption will expand smartphone demand but 2019 phones will have to be compatible with it or they will be selling high-end phones that customers could fear would be rapidly obsolete. Apple will probably expand trade in deals to move new deals with cell phone networks.

In spite of problems, Apple expects to obtain $5 billion of sales in India. Developing countries are a source of new volume, which may require a low-cost design for these markets. New products are difficult. Apple TV ran into a market that moved faster toward Netflix (NASDAQ:NFLX) and Amazon's (NASDAQ:AMZN) Fire than they anticipated. Apple home has a difficult competitor in Amazon with its low-cost devices.

The chart below illustrates the continued dominance of the iPhone. Apple will need to develop other sectors, but it has the resources to do that.

Conclusions

Apple is very likely to beat the financial guidance as higher revenue per phone partially offsets the lower unit sales. It has been a prosperous holiday with sales up four and a half percent over 2017. Apple could exceed guidance. This would lead to a recovery in Apple stock, which is currently selling at a P/E of 13. Analysts have constantly underestimated Apple's ability to grow and Apple has proved them wrong. It is a strong buy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.