Amdist the COVID-19 coronavirus pandemic, with Apple warning in mid-February that they did not expect to meet the revenue guidance they provided for the March quarter (Q220), why would anyone want to own Apple shares heading into Q2 earnings?
For one, the slew of Street downgrades over the last week underestimates the long-term outlook on iPhone and Services revenue, in my view, both of which should continue to support growth, driving upside to the earnings growth algorithm. Thus, Apple’s transformation into a services-oriented growth model, coupled with the continued expansion in its installed base, more than warrants the current multiple of ~22x, in my view. With additional optionality around the capital return likely to drive double-digit earnings growth potential, I expect further upside from here.
The release of a $399 iPhone SE is timely – it gives Apple a more competitively priced offering at a time when consumer incomes are likely dropping… Paid subscription growth has been a key bullish point thus far, crossing 480m last quarter, prompting management to set a new 600m target for CY20. Apple looks on track to beat this target, in my view, given subscription services could benefit from the increased indoor activities. Apple’s growing new services offerings (e.g., Apple TV+ and Apple Arcade) coupled with its growing installed base points toward continued services growth, in my view – even following a record 2019.
The recent work-from-home trend could also serve as a short-to-medium-term tailwind to Mac sales for the June quarter, assuming limited supply disruptions to PCs… Further, Apple’s ~$60bn in annual FCF generation, coupled with ~$100bn in cash on the balance sheet, means Apple has the flexibility to not only sustain but also grow its dividend through a recession while re-investing in the business.
MacDailyNews Take: There are plenty of excellent reasons why an investor would want to own Apple shares heading into Q2 earnings: a strong product portfolio that will benefit from the COVID-19-induced work-from-home trend, a strong balance sheet, growing Services, and a potential dividend hike.
Apple is slated to release Q220 results after market close on Thursday, April 30, 2020. We’ll have them for you as always right around 1:30pm PDT / 4:30pm EDT. Apple’s conference call to discuss Q220 results is scheduled to start right after that at 2:00pm PDT / 5:00pm EDT. We’ll cover the conference call with live notes as usual, too. Just check our home page around 1:45pm PDT / 4:45pm EDT on Thursday, April 30, 2020 for that link.