Apple - Another Solid Rally On Thursday
In the past 3 days the S&P 500 is up 3.75%. It was up 1.06% on Thursday. Nasdaq was up 1.75%, but that looks to be short lived. Apple fell after hours.
Tussell 2000 increased 2.22% and the VIX fell 8.9%. Even though stocks have been roaring higher in the past 3 years, the CNN Fear and Greed index is stuck at 7. This is because of the volatile action. Personally, I remain bullish on stocks for the next month.
The worst 2 sectors were utilities and communication services. It’s good to see utilities were down 0.53%. But it’s disconcerting to see communication services only up 0.14%.
Facebook stock fell slightly after ramping on great earnings on Wednesday. The materials and consumer discretionary sectors were the best. They increased 3.02% and 2.23%.
Consumer discretionary will be helped by the burst in real wage growth. That should help boost holiday shopping.
Apple - A November Rate Hike?
Even though the dollar fell 0.83% to $96.30, oil fell 0.14% to $63.60. This decline in oil prices helps the consumer.
10 year yield fell 1 basis point to 3.13%. Long bond has been rallying in the past few weeks, but it has been modest.
It seems like investors are waiting for economic growth to slow. However, it hasn’t fallen enough to justify the 10 year yield falling back below 3%.
The 2 year yield fell 2 basis points to 2.84%. That’s 7 basis points below the cycle high. The chance for a hike in December is eroding. But oddly as you can see in the chart below, the chance of a November hike is increasing.
As you can see, it is now at a non-insignificant 15.3%. Since I think the stock market will do well in the next month, the odds should increase further. I think there will be one more hike this year. It doesn’t matter if it’s in November or December.
Apple Beats Estimates, But Shares Plummet On Light Guidance
Apple stock fell 6.39% after hours after beating EPS and revenue estimates.
Weakness that's partially about the weak guidance. And it's partially about the fact that it had run up so much heading into the quarter.
Unlike some of the other major internet names, Apple has done well in the past quarter. In the past 6 months, the stock is up 25.85%. That's massive move for the biggest company in the world. Even with its flatlining iPhone unit sales.
Heading into the report, the stock was only 4.2% off its record high. Usually tech stocks are more volatile in corrections. But Apple fell 8.54% which was better than the S&P 500.
Apple reported $2.91 in EPS which beat estimates for $2.78. Even more impressive, it reported $62.9 billion in revenues. This beat estimates for $61.57 billion.
iPhone sales were 46.89 million which missed estimates for 47.5 million. Trailing 12 month iPhone shipments only increased 1 million to 218 million as compared to Q4 last year.
Even though iPhone shipments missed estimates, the company beat on the bottom and top line. Average selling price for iPhones was $793 which beat estimates for $750.78.
At the end of the quarter, the new more expensive iPhones did well. Amazingly, consumers are still excited about iPhones at the more expensive prices.
Apple - Unsustainable Growth
ASPs were up 28% year over year. I don’t think that’s sustainable.
To me, Apple ran out of new ideas for products which could replicate the growth of iPhone. So it decided to raise prices and offer more options which aren’t needed.
That has worked, but it’s only a short term gimmick to grow profits. It’s impossible to grow the average selling price of a product by 28% every year while maintaining similar volumes.
Apple Watch is a successful niche product, but it won’t replace iPhone. To be fair to Apple, it’s very tough to replicate the most profitable product in the history of humanity.
The best new product category is AI. But Apple’s Siri is falling behind Google and Amazon’s assistants.
Tim Cook claims iPhone unit sales are less relevant to the business. I agree, but the saturated smartphone market still isn’t a good thing.
As you can see from the chart below, Apple gets 59.1% of its revenues from iPhone and only 15.9% from services.
Apple has done a good job of squeezing more revenues from its users. Services revenues were up 4.1% quarter over quarter. However, I still think Apple is reaching the limit. I think Apple Care is a bad deal for customers, so I don’t see that as a long term driver of growth.
I get skeptical of being bearish based on the guidance from the top tech firms. Sometimes it is just the company being overly conservative.
The stock fell as Q1 revenue is expected to be between $89 billion and $93 billion. That’s below the average estimate for $93.02 billion.
Unless Apple sees something in October sales which wasn’t shown in this latest report, I expect Apple to have underestimated Q1 results. I’m bearish on Apple in the long term. However, I wouldn’t sell the stock. The holiday season will be weak for the company.
Apple - Conclusion
Apple is large enough to take down the entire market if it falls too sharply.
In the intermediate term, the market doesn’t need Apple to rally, but it effects short term action. I think the market is still extremely oversold. And it's cheap now as earnings growth of above 20% has catalyzed severe multiple compression.
There are justifiable fears over tariffs and rate hikes. But I still think stocks can rally. The good news this week on trade is President Trump had a positive phone call with President Xi.
Hopefully, that leads to a meeting and a deal by the end of the year.