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Apple - strong revenue but iPhones disappoint

Sophie Lund-Yates, Equity Analyst | 30 October 2020 | A A A
Apple - strong revenue but iPhones disappoint

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Apple Inc Com Stk NPV

Sell: 141.94 | Buy: 141.96 | Change -3.43 (-2.36%)
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Fourth quarter revenue of $64.7bn was up 1.0% on last year, and ahead of market expectations of $63.3bn. However, iPhone sales were disappointing - with the better overall revenue performance driven by a large beat in Mac sales, and Services revenues which were slightly better than anticipated.

Cost of sales were broadly flat, but higher research & development, and other costs, meant operating income fell to $14.8bn (2019: $15.6bn).

A dividend of $0.205 per share was announced.

The shares fell 4.4% in pre-market trading.

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Our view

The market was disappointed by lacklustre iPhone sales.

That's because despite what Apple would have us believe, it's is still very much a hardware business. Apple needs to be able to keep the upgrade cycle going or the market's opinion of Apple will wobble. There's no real room for forgiveness in the current valuation.

The initial reaction to the new 5G enabled models is apparently very positive, but we'll have to wait and see exactly what that means next quarter. The positive momentum in products like Macs and iPads has been impressive, boosted by the new working and learning from home cultures. But these aren't Apple's traditional bread and butter, and it's very possible these purchases have simply been pulled forward.

To the group's credit though, the overall performance through the current crisis has been a lot better than we might have feared. Growth is slower, particularly in Greater China - but to keep the top line moving as it has done is no mean feat.

That's a function of Apple's world leading brand and legions of dogmatically loyal customers. Both of which Apple's looking to take advantage of that with its Services business - now comfortably the second largest division. It makes money from charging subscriptions for its music service and getting fees from app developers to use the App store. Service margins are higher and revenues should be reliable - even in this environment - which all being well will take the pressure off the group to deliver constantly rising hardware sales in the future.

And the group's quietly been building its own search function, following anti-competition investigations into its relationship with Google. (Regulators have taken issue with the close ties between Alphabet and Apple, with the former paying eye watering sums to have its search engine front and centre of Apple's devices). It's very early days and Google is just about the toughest brand competitor there is, but if Apple can swipe even a small slice of the search engine pie, it would be a good source of energy for revenues.

Overall we think Apple's core remains strong, but future spoils rely on growing higher-margin areas of the business while also creating another generation of coveted products. We've been impressed by recent momentum, but we'll need to see how the latest products resonate before signalling out-and-out positivity.

Apple key facts

  • Price/Earnings ratio: 29.4
  • Average Price/Earnings ratio since listing (2012): 14.2
  • Prospective dividend yield (next 12 months): 0.7%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Fourth quarter trading details

iPhone sales of $26.4bn fell 20.7% compared to the same time last year, against the market's expectations of $28.1bn. In contrast, Mac revenues of $9.0bn were 29.2% ahead of 2019, and iPads saw a huge 46.0% increase to $6.8bn. Wearables, Home and Accessories posted revenue of $7.9bn, up 20.8% and Services rose 16.3% to $14.5bn.

Luca Maestri, Apple's CFO highlighted that the number of active installed Apple devices are at an all-time high across all major product categories.

The group said the positive trends in Macs and iPads were boosted by people working and learning from home.

There was growth in every region apart from Greater China, with only marginal increases in Japan.

For the year as a whole Apple generated free cash flow of $73.4bn, against $58.9bn last year. Apple had net debt of $21.5bn at the end of September, which was an increase compared to $7.5bn this time last year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.