When Apple released a letter to investors in January 2nd warning that they would miss guidance for the first time in 17 years, it took much of the mystery out of last week’s earnings report. Here are my main 3 takeaways from last week’s call.
1. China Region is the problem, not Apple as a whole
In that letter, CEO Tim Cook pretty much told us what the numbers would be for Q1, so the biggest question for shareholders last week revolved around guidance for Q2, a quarter in which China typically shines due to the Chinese New Year gift-giving holiday. So when Apple guided for between $55B-$59B it sparked a bit of relief rally in after-hours trading. This rally has continued, with shares trading around $170 as of this morning from about $155 at the close of trading on Tuesday before the earnings release. In addition to this, in the weeks between Apple’s warning and their official earnings, many other global companies reported their own struggles in China. This helped show that China is experiencing slowing growth overall, and gave investors confidence this was not an Apple-specific issue.
2. Wearables (Medical) growing like crazy
Helping to confirm that Apple is indeed growing aside from China were the breakdowns on the Wearables and Services segments. The category now called Wearables, Home and Accessories reported YOY growth of 33% and is approaching the size of a Fortune 200 company, a comparison that Apple likes to make for their product segments. This category is highlighted by the Apple Watch and, to a lesser extent, Airpods. On the call, Tim Cook again stated that Airpods were constantly selling out, with the company doing its best to keep up with demand even as reports of the next version (said to come in black and to include medical sensors) swirl. These 2 products point to Apple’s medical aspirations, and Cook even stated in a recent interview with Jim Cramer that years down the road people will look back and say Apple’s biggest contribution to society will be in the medical field. This all points to unannounced products and partnerships that will help appease investors who worry what comes next for Apple should iPhone growth plateau.
3. The Media Bundle is coming
Mainly because Apple stock has been beaten down so much over the last few months (from a high around $233/share to about $155 at the time of the call) Tim Cook decided to soften his typical “We don’t talk about unannounced products” stance when asked about an upcoming Video service. Instead, he acknowledged that the “breakdown of the cable bundle” has gained momentum over the last few years and that he expected that to continue this year, adding that Apple will “participate in that in a variety of ways”, citing original content plans and a previously-reported partnership with Oprah Winfrey. There have been many other reported shows that Apple has ordered featuring a variety of producers and directors so it was difficult for Cook to give his standard answer on this one. Currently, there is a lot of speculation that Apple could launch a Media Bundle, consisting of some combination of video, music, news and gaming that could potentially challenge Netflix in a best case scenario but at least become a new subscription revenue generator at the worst.
These three factors gave investors confidence that all of Apple’s R&D spending over the last few years will indeed produce new income streams in the near future. Combine this message with the newly reported Services Margin breakout (a very healthy 63%) and Apple seemed to do a fairly good job of turning the earnings warning negative into a positive outlook moving forward.