Apple Inc (AAPL)

[Wisebuys]

Thanks for posting very good analysis of AAPL - Red flag when signs of weakness showing they cant compete with other high end OEM's

APPL started the day very weak and only shot up by close cause hedge funds decided to run it - lets see if the run can be sustained or people sell into the pump.....

http://seekingalpha.com/article/3614506-apple-the-music-will-stop-eventually

Summary

AAPL reported in-line revenue and EPS beat, but noticeable miss on iPhone unit sales is a key concern.

App sales growth of +25% remains the only bright spot in AAPL's product portfolio. Over-leverage to the iPhone remains a key product risk.

Remain bearish on AAPL.

Apple's (NASDAQ:AAPL) September quarter can be characterized by largely in-line revenue driven mostly by higher ASP and mounting evidence of product maturity from the miss in iPhone unit sales (48.05m vs. cons. 48.5m) and iPad sales (9.88m vs. cons. 10.2m). China remains the key geographical driver, but I question it sustainability given the trend of Chinese OEMs moving up the smartphone price ladder. The App Store remains a driver, but the +25% growth raises the concern of the potential risk to the ecosystem. Finally, management's meager commentary on the Apple Watch and Apple Pay reinforces my prior concerns that Apple remains a single product company centered around the iPhone. Over time I continue to see key product risk to be the single biggest concern among large institutional investors. I am reiterating my cautious view on AAPL.

Revenue of $51.5b, +22%, was largely in-line with consensus while EPS of $1.96 beat by $0.08. The noticeable weakness was on the product segment with iPhone shipments missing estimates on what appears to be a combination of a maturing product cycle, lower upgrade rate and the shift in the carrier distribution model for the device. Additionally, the revenue appears to be supported by higher ASP that offset the weak demand. I note that iPhone ASP increased by $10 to $670 from the prior quarter. I am skeptical of the sustainability behind iPhone's price inflation given that there is only so much an average consumer can accept for iPhone's premium pricing.

Although the bulls may argue that AAPL's September quarter has been seasonally weak given that only one week of the new iPhone sales were factored into the result, I counter that the December quarter revenue guidance of $75.5 - 77.5b implies just +1-4% y/y growth. This underscores my bearish view that iPhone comp sales will become increasingly more difficult going forward. The flat stock price reaction after the quarter suggests that the market continues to be optimistic about the December quarter and is at least giving AAPL a chance to prove the skeptics wrong. I would not be so optimistic given the sluggish guidance.

As for the other products, iPad's decline continues to be an overhang on the overall performance of the product portfolio and the lack of disclosure on the Apple Watch reinforces my view that AAPL remains a single product company. With the iPad being on the market for five years now and seeing sluggish demand, and the Watch failing to gain traction, most investors appear to be comfortable with AAPL's key product risk. However, I caution that iPhone's innovation curve is reaching a limit and it is difficult to see how differentiated the device may be in the near-term. Technology comps are indeed becoming harder to match and expectations remain high for AAPL to deliver another killer product. The increased expectation also increases the risk of disappointment. I would not be surprised to see AAPL produce flat or no growth in the next iPhone quarter.

Service revenue increase of +10% was driven by the +25% growth in App Store, suggesting that iTunes, Apple Pay and Apple Music still have yet to prove that they can become the next killer product for the company. Although App Store growth is decent, decelerating trend could point to a challenged ecosystem given that app sales are a key factor in retaining iPhone users.

Conclusion

I usually prefer companies with lower than average product risk, but AAPL is certainly not one of them given its leverage on the iPhone. With comps becoming increasingly difficult and expectations at risk of a miss, I would avoid AAPL.

Additional research:

Apple Earnings Preview: When Will The Music Stop?