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Apple - Sales growth slows

Steve Clayton | 27 January 2016 | A A A
Apple - Sales growth slows

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Apple Inc Com Stk NPV

Sell: 173.18 | Buy: 173.19 | Change 1.09 (0.63%)
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Apple's last quarter saw sales growth virtually grind to a halt as iPhone sales barely increased and the iPad went into reverse. The company also revealed that it expects iPhone unit sales to decrease in the March quarter, the first reverse in the product's history.

Sales rose by 2% to $75.9bn, and would have been 8% but for currency movements. Earnings per share rose 7% to $3.28 for the quarter, in line with market forecasts.

Despite the gloomy tone, Apple still sold 74.8m iPhones in the quarter. But revenue guidance for the next quarter was set at $50-53bn, lower than analyst's expectations of $55bn. Talking to analysts, CEO Tim Cook said that he thought expectations of a 15-20% drop in iPhone sales were over-blown and that the next quarter would be the toughest, because of very high sales levels a year ago.

Greater China is still growing for Apple, which saw revenues there rise by 14%, but finance chief Luca Maestri revealed that Apple was now seeing some weakness appearing in Hong Kong. But iPhone sales are already in decline in the US and Japan.

For the first time, Apple revealed how many "active users" it has, saying that there are now 1bn devices in active use, 25% higher than a year ago. These are customers that have connected to services such as the App Store, iTunes and iCloud in the past 90 days. Mr Maestri argued that the markets were not valuing this user base in the same way that other internet services businesses are valued.

Our view:

If we have reached the point of Peak iPhone, then it is a significant milestone in Apple's history. No other product that we can think of has achieved such commercial success in such a short period of time. In 2006, before the iPhone launched, Apple had sales of $19bn. Last year they achieved $233bn of revenues and a net cash balance of over $140bn.

The iPhone no longer has such a lead over the competition, but it does have the advantage of that huge base of active users and a parent who can support it with almost limitless resources. Writing off Apple on the basis of a weak quarter at a time of global turmoil could well be premature.

The recurring revenues that the active user base can offer could be very significant. Last year Apple reported $19.9bn of revenues from Services and with the launch of Apple Music, and other products like iCloud storage plans, Services revenues could well grow even if iPhone revenues stall or decline.

The iPhone still accounts for around two thirds of revenues and the Apple Watch has barely moved the dial, as far as anyone can see. Rumours abound of an Apple Car on its way, but the company are keeping schtum about that so far.

Services are likely to carry higher margins and better cash generation than product sales, for they need no factories, stores or raw materials to generate their revenues. But the market will remain fixated by product sales a while longer, given how important the iPhone is.

Apple shares trade on under 11x earnings, reflecting concerns over the sustainability of the iPhone's lead in the smartphone market. Adjust for the huge cash pile and the multiple falls to more like 6x for the underlying business. If Apple can keep the margins they make on iPhone intact, and really begin to exploit the revenue potential of that billion-strong installed base of active Apple product users, that could be supportive. The next major refresh of the iPhone will be important, and clearly a successful Apple Car could be a game-changer, if it ever drives out of Apple's Cupertino HQ.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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