Shares of Apple (AAPL) are on the rise following better than expected earnings per share for the first quarter and revenue in line with its negative preannouncement. Commenting on the results, Piper Jaffray analyst Michael Olson said the news turned out not as bad as expected. Not as bullish, Macquarie analyst Benjamin Schachter pointed out that the iPhone remains the biggest issue, while Oppenheimer analyst Andrew Uerkwitz argued that iPhone pricing will stay "a major hurdle" if Apple chooses to protect hardware margin at 30%-plus.
RESULTS: On Tuesday after market closed, Apple report first quarter earnings per share of $4.18 and revenue of $84.3B, both above consensus estimates of $4.17 and $84B, respectively. For the second quarter, the company said it sees revenue between $55B-$59B, with consensus at $58.99B, gross margin between 37%-38% and operating expenses between $8.5B-$8.6B. Additionally, the tech giant said revenue from iPhone declined 15% from the prior year in fiscal first quarter, while total revenue from all other products and services grew 19%. Services revenue reached an all-time high of $10.9B, up 19% over the prior year, in the quarter. Revenue from Mac and Wearables, Home and Accessories also reached all-time highs, growing 9% and 33%, respectively, and revenue from iPad grew 17%.
NOT AS BAD AS FEARED: Commenting on Apple's quarterly results, Piper Jaffray's Olson pointed out that the news turned out not as bad as expected, and said some investors that had been sidelined will likely re-visit the stock. The analyst reiterated an Overweight rating and a $187 price target on the shares. Voicing a similar opinion, UBS analyst Timothy Arcuri told investors that he believes "the worst of the bad news" is behind Apple. The analyst remains optimistic as he believes the worst of the bad news is over for a while, Apple getting a paltry $30M/quarter from its largest third-party subscription app shows the vast fertile ground, iPhone replacement cycles continue to elongate, and new proprietary content and aggregation services this year should spur a pivot in the narrative. Arcuri reiterated a Buy rating and raised his price target on the shares to $185 from $180. Also keeping an Overweight rating on the stock, JPMorgan analyst Samik Chatterjee argued that Apple's fiscal second quarter revenue guidance of $55B-$59B "managed to reassure investors that volume risks are largely priced in the shares at current valuation." While the earnings report will do little in terms of addressing some of the medium-term concerns that investors have relative to the drivers of revenue growth as the smartphone cycle matures, book-ending the downside on volumes will help in driving investor focus back to the Services opportunity, Chatterjee contended.
IPHONE REMAINS 'BIGGEST ISSUE': Keeping a Neutral rating on Apple's shares, Macquarie analyst Benjamin Schachter said he remains focused on Services, which he expects will continue to slow. Further, he expects lower-margin businesses such as Music, iCloud, and potentially video to drive more top-line growth, while higher-margin businesses such as App Store and Licensing will slow. Further, the analyst pointed out that the iPhone remains the biggest issue. Meanwhile, Oppenheimer analyst Andrew Uerkwitz noted that while Apple cited foreign exchange headwinds again as one of the major culprits for emerging market weakness, management finally openly admits that iPhone price is another factor. The analyst is not sure such an observation will eventually impact design and pricing considerations, but believes pricing will stay "a major hurdle" if Apple chooses to protect hardware margin at 30%-plus. Longer term, Uerkwitz sees the least upside from service revenues in Greater China due to a robust local Android ecosystem, formidable competition, and handicaps on in-house services from government regulations. The analyst reiterated a Perform rating on Apple shares.
EXTREMELY CHALLENGING FOR SUPPLIERS: KeyBanc analyst John Vinh views Apple's muted iPhone results and guidance as consistent with his lowered expectations related to the current iPhone cycle. Despite opportunities for content gains, the analyst added that he thinks it will be "extremely challenging" for Apple supplier stocks, such as Cirrus Logic (CRUS), Qorvo (QRVO), Skyworks (SWKS), and Synaptics (SYNA), to work in the current cycle, as he anticipates declining iPhone shipments this year. His favorite Apple supply chain name remains Broadcom (AVGO), as he is increasingly confident in the company's M&A strategy and ability to diversify its exposure away from mobile, while continuing to gain share and grow content at Apple.
PRICE ACTION: In morning trading, shares of Apple have gained over 4% to $160.90.
