Apple earnings and longer-term analysis
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The most important part of $AAPL’s earnings is this, as it reveals how big the Apple Ecosystem has become: Apple has more than 1 billion devices online — something it’s never revealed before. Look at how big of a chunk App Store, iTunes and Software revenues make up of the total pie for the company now.
Actual: $6BB, Estimate: $5.3BB, Surprise: 14.66%
Those Enterprise, Cloud, App Store, iTunes, Software Services revenues are a large part of why I’ve long said that Apple and Google are a couple of the best ways to invest in the App Revolution. That’s $6 billion over the last 90 days. And that should grow exponentially over time from here.
The bigger the number of connected Apple devices (again, now over 1 billion), the faster the growth of this sector of Apple’s business will grow. A few more years of 15% compound annual growth in from the $6 billion base of last quarter would mean that we’re looking at $40-50 billion of high margin revenues from the App Store, iTunes and Software in five years.
Apple CEO Tim Cook explained that one of the biggest factors in the company’s miss is the stronger dollar which is making it more expensive for Apple to sell its products overseas:
“We’re seeing extreme conditions unlike anything we had experienced before just about everywhere we look. Major Markets including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the Euro zone have been impacted by slowing economic growth, falling commodity prices and weakening currencies. 2/3 of Apple’s revenue is now generated outside the United States so foreign currency fluctuations have a very meaningful impact on our results. $100 of Apple’s non-US dollar revenue translated to only $85 last quarter due to the weakening currencies in our international Markets….. we began to see some signs of economic softness in Greater China earlier this month, most notably in Hong Kong. Beyond the short-term volatility, we remain very confident about the long term potential of the China market”.
Apple focusing on how the strong dollar is impacting its business is exactly what I was talking about when I say that the pressures on the Fed to use extreme measures (yet again) to weaken the dollar are likely to drive its next policy decision(s). I even mentioned Apple specifically:
“What’s interesting is that pretty much every bearish macro-economy, geopolitical, currency, corporate earnings, energy and commodity bullet point we mention — basically everything ailing the global economies and stock markets — would be helped by a weaker dollar. Meaning that the Fed’s got a helluva lot of reasons to cut rates back to 0% and even kick-start another round of QE and try to come up with newer ways to print some money. You certainly can take any further rate hikes off the table.
A Fed back in easing mode and a weaker dollar would help alleviate the increasing pressures of China’s currency devaluation nearing a breaking point, it would help stop the endless decline in oil and commodity prices, it would help re-inflate export-centric economies and corporations — think Cat, GE, Apple, etc. — and might even force savers and sidelined cash further into higher-risk assets like the stock market.”
I’ve owned Apple for more than a dozen years and it’s helped me build my career and portfolio and quite simply — I don’t own Apple stock as a way to play currency wars. I own it because it’s a Revolutionary Company. And that’s why we go back and think about why the Apple Platform/Ecosystem is so key to the long-term.
For the last 90 days of 2015, $AAPL’s business look pretty darn good, especially relative to expectations, which were awfully low heading into this report and given how strong the currency headwind has been for Apple too. But that’s just 90 days. We’re here to build our portfolios over the next 10,000 days. Remember that old Apple ad, “Think Different.” Well.
At any rate, I am simply holding my Apple common and call options still. I think those call options still might have a chance, though small now, despite today’s hit. I still expect this stock to run towards $130 by the end of this year and more importantly, I think we can continue to get paid nice dividends and see capital appreciation as Apple’s ecosystem and margins grow.
