Apple's stock is surging, but Wall Street analysts thought earnings results were just 'fine'

“Simply put Apple’s results and outlook across most metrics were clearly better than expected. As a result both our and consensus estimates will move slightly higher and based on a 14.5x PE (10% discount to the market) on our slightly higher EPS estimates still result in a target price of $220 and we reiterate our Buy rating. It is no surprise that we get a lot of pushback on our Buy rating on Apple given 1) its large market cap, 2) iPhone sales have entered negative growth 3) Android has more market share and less expensive average selling points and 4) investors feel innovation at Apple has been lacking.”

“AAPL’s 2Q print will help fuel the bull case for the stock with a nice beat on Rev/EPS and a 3Q Rev guide $1.5B ahead of the street at the midpoint. We believe investors will react favorably to Cook’s commentary around improvements in China demand with iPhone units potentially troughing in the Dec. quarter. Given the improved sentiment and outlook our new $210 PT implies ~16x our FY20 EPS estimate. Heading into the print there was still lingering concern about iPhone demand in China, but it appears company decisions to lower prices and offer trade-ins may ease fears. While we acknowledge that a 22% decline in China revenue is far from a resurgence, Tim Cook did highlight that iPhone declines in the last few weeks of March were significantly smaller than they were to start the quarter. The key drivers of the improved demand in China were the reduction in the VAT from 16% to 13%, the trade-in promotions, the price cuts, and improving trade relations between the US and China. These data points are all positives for Apple, but they also do little to address the question of the iPhone’s competitive positioning against the like of Huawei, Oppo, and Vivo, who have been net share gainers.”

“Shares of Apple traded higher post-close as we think the company’s June quarter guide + commentary support the view that we are now seeing indications stabilizing / bottoming iPhone demand (particularly in China), coupled with continued solid double-digit growth in Apple’s services business (+16% y/y). While Greater China revenue declined 21.5% y/y in the March quarter, Apple reported that it saw better y/y iPhone performance in the last few weeks of the March quarter than the full quarter and what the company views as a trough in the months of Nov and Dec ’18. Apple reported that improved demand has been driven by: (1) Apple’s pricing actions and trade-in / financing programs, (2) China’s consumer stimulus efforts / reduction of VAT rates, and (3) improved U.S. / China trade dialogue. While Apple highlighted the success of its iPhone trade-in program, in part driven by its higher incentives, we think anticipation of a 5G iPhone in 2020 could impact upgrades. As such, we are leaving our forward estimates relatively unchanged with C2019 and C2020 at $255.9B / $11.55 and $274.6B / $13.62 vs. our prior estimate of $249.7B / $11.58 and $272.8B / $13.62. We maintain our Market Perform rating; adjust our price target to $215/sh. (15.8x P/E C2020E vs. 5-yr. median of 13.4x). We continue to have a cautious view on Apple’s Services growth sustainability over the coming quarters.”

“While iPhone numbers were weaker than we had expected we were pleasantly surprised by positive trends in iPad, Wearable and Mac in both reported revenues and guidance. In guidance, we believe that new iPad Mini/Air models, Airpods and non-CPU supply constrained Macs add up to slightly better revenue even as iPhone results remain lackluster. Though in line with our above consensus expectations we point out that guided Opex implies operating margins of ~21% that have not been seen since 2008 when the iPhone was just getting started. We believe fundamentals get more challenging as the year progresses and that the stock remains toward the top of its valuation range vs. the S&P 500. We reiterate our Neutral rating.”

“While “less bad” is a significant improvement from the rough start to the year, we remain Neutral as we see a long road to recovery for iPhone with a ~1yr jump in the net replacement cycle in CY19 (per CSe) and further extension ahead of 5G in 2H20. Further, while we recognize the potential in the shift to Services we don’t think it’s enough to move estimates meaningfully higher over the near-to-medium term, leaving upside for the stock more dependent on the multiple re-rating higher. Against a backdrop of sizeable iPhone sales declines, we think the investor perception of Apple as a hardware-centric company will be tough to shake. With the stock trading near a peak multiple, we remain on the sidelines awaiting a better entry point and/or line-of sight to significant Services-led upside.”

“Apple’s fiscal Q2 was fine. On net, we continue to see risk-reward on Apple as relatively neutral. While numbers for FY 19 are likely safe and the stock tactically tends to outperform around this time of year, we note that Apple’s valuation has already returned to its peak from last year, next year’s iPhone cycle appears uninspiring (with 5G most likely destined for introduction in Sept 2020), and this cycle’s temporary price cuts will not resolve the fundamental question circling the stock, i.e. the structural lengthening of iPhone replacement cycles.”

“March Q slightly better but the real surprise was June quarter guidance. In-line with our recently raised March quarter estimates, Apple beat consensus revenue by 1% and EPS by 3% driven largely by iPhone, where we saw improving share in China and stable supply chain builds through the quarter. More importantly, June quarter guidance for a revenue decline of 8% Q/Q is materially better than historical seasonality of 13-16% Q/Q declines, and consensus view of -11% Q/Q heading into the print. Better revenue guidance speaks to the improved iPhone trajectory in the month of March which carried into April, helped by 1) iPhone pricing cuts and trade-in/financing programs, 2) stimulus in China (such as VAT tax reduction from 16% to 13%), and 3) improved consumer confidence from advancing US/China trade dialogue. Net, our FY19 and FY20 revenue and EPS estimates move slightly higher which translates to a new SoTP-based PT of $240, up from $234 previously. Apple reported a clean March quarter and bullish June quarter outlook which against a backdrop of negative investor sentiment sets up for shares to move higher.”

“Looking at the remainder of FY19, we expect limited excitement around this year’s iPhone launches, however, we believe that as long as services revenue continues to perform at or above expectations, this will tide investors over until anticipation for 5G iPhones begins to build, which is likely to start happening in 2H CY19. Maintain OW, raising PT to $230.”

“On the back of June revenue guidance that was a little better than expected, AAPL delivered a solid Q – albeit with nothing new to really pivot the narrative in either direction. The worst is behind us in iPhone (mgmt was clear that March was a much better month and our data already shows AAPL is essentially at replacement) and noniPhone hardware categories are showing some strength (though clearly nowhere near as important as iPhone) ahead of easing FX headwinds. Services growth decelerated again Y/Y, but this was expected and the segment starts to face much easier comps moving forward just as new offerings start to become additive. Margins remain a concern as it is an open question whether AAPL can re-capture higher 5G component costs in 2020/2021, while opex still seems wholly disconnected from revenue. For now though, vectors point in the right direction and this is the time of the year when this stock does best (outperformed SPX in 4 of last 5 years in Apr-Oct period) and it remains the biggest global under-weight in the entire market.”