Apple (AAPL) Down 9.8% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Apple (AAPL). Shares have lost about 9.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Apple due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Apple’s Q1 Earnings Beat, iPhone Sales Increase Y/Y

Apple reported first-quarter fiscal 2020 earnings of $4.99 per share that beat the Zacks Consensus Estimate by 9.9% and increased 19.4% year over year.

Net sales increased 8.9% year over year to $91.82 billion, which surpassed the Zacks Consensus Estimate of $87.74 billion. The figure also beat management’s guidance of $85.5-$89.5 billion. However, foreign exchange volatility negatively impacted sales by $1 billion.

Product sales (86.2% of sales) increased 7.7% to $79.10 billion. Services (13.8% of sales) revenues grew 16.9% from the year-ago quarter to $12.72 billion.

Active installed base of devices surpassed 1.5 billion, up more than 100 million in the past 12 months.
 
Geographical Performance

Americas sales rose 12% year over year to $41.37 billion and accounted for 45.1% of total sales.

Europe generated $23.27 billion in sales, up 14.3% on a year-over-year basis. The region accounted for 25.3% of total sales.

Greater China sales rose 3.1% from the year-ago quarter to $13.58 billion and accounted for 14.8% of total sales. Apple stated that the Services segment grew at a double-digit rate in China.

Japan sales declined 9.9% year over year to $6.22 billion and accounted for 6.8% of total sales.

Rest of the Asia Pacific generated sales of $7.38 billion, up 6.5% year over year. The region accounted for 8% of total sales.

Apple established new first-quarter records in the United States, Canada, Mexico, Brazil, the U.K., Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam.

iPhone Sales Details

iPhone sales increased 7.6% from the year-ago quarter to $55.96 billion and accounted for 60.9% of total sales. Customer response was exceptional for the new iPhone 11, 11 Pro and 11 Pro max. Moreover, sales benefited from trade-in programs, which doubled on a year-over-year basis.

Active installed base of iPhone reached a new all-time high in each of the company’s geographic segments.

Apple quoted a recent survey report from 451 Research, which stated that customer satisfaction was 98% for iPhone 11, iPhone 11 Pro and 11 Pro Max combined.

Services Momentum Continues

Services maintained momentum in the reported quarter. The company witnessed double-digit growth across all geographic segments. Robust performance of cloud services, music, payment services and the App Store search ad business drove Services revenues. App Store and AppleCare reported a record first-quarter performance in the company’s history.

Apple has now more than 480 million paid subscribers across its Services portfolio, up 30 million sequentially and 120 million year over year. Third-party subscription revenues increased 40% year over year.

iPad & Mac Details

iPad sales of $5.98 billion decreased 11.2% year over year and accounted for 6.5% of total sales. The decline can be primarily attributed to difficult comparisons due to the launch of iPad Pro in the year-ago quarter.

iPad sales were strong in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines and Vietnam.

Additionally, more than half of the customers, who purchased iPads during the quarter, were new to the device. iPad’s active installed base also reached a new all-time high.

Apple quoted a recent survey report from 451 Research, which stated that overall consumer and business satisfaction was 93% and 92%, respectively, for iPad.

Mac sales of $7.16 billion decreased 3.5% from the year-ago quarter and accounted for 7.8% of total sales. The decline can be primarily attributed to difficult comparisons due to the launch of MacBook Air and Mac Mini in the year-ago quarter.

Apple launched the 16-inch MacBook Pro, its most powerful notebook ever, during the reported quarter. Moreover, the company also launched Mac Pro and Pro Display XDR.

Globally, more than half of the customers, who bought Macs during the quarter, were new to the device. Active installed base of Mac also reached a new all-time high.

Wearables’ Robust Performance

Wearables, Home and Accessories sales surged 37% year over year to $10.01 billion and accounted for 10.9% of total sales. Wearables grew 44% year over year.

The solid year-over-year growth was driven by strong demand for AirPods and Apple Watch. AirPod sales benefited from the launch of AirPod Pro, which features active noise cancellation.

Moreover, Apple Watch’s adoption rate grew rapidly. Notably, more than 75% of customers who purchased Apple Watch during the reported quarter were first-time customers.

Apple Gaining Traction Among Enterprises

Apple is gaining traction among enterprises, particularly end markets like healthcare.

The company stated that 100% of the Fortune 500 companies in the healthcare sector are using Apple’s technology in areas like patient experience, clinical communications and nursing workflows.

Operating Details

Gross margin expanded 40 basis points (bps) on a year-over-year basis to 38.4%, which was within management’s guidance of 37.5-38.5%.

Operating expenses rose 11.1% year over year to $9.65 billion due to higher research & development (R&D), and selling, general & administrative (SG&A) expenses, which grew 14.1% and 8.7%, respectively. The operating expenses figure was close to the lower end of management’s guidance of $9.6-$9.8 billion.

Operating margin expanded 20 bps on a year-over-year basis to 27.8%.

Balance Sheet & Cash Flow

As of Dec 28, 2019, cash & marketable securities were $207.06 billion compared with $205.89 billion as of Sep 30.

Term debt, as of Dec 28, was $93.08 billion, up from $98.47 billion as of Sep 30.

Apple issued a €2-billion green bond, retired $1 billion of maturing debt and reduced commercial paper by $1 billion during the reported quarter. As of Dec 28, total debt was $108 billion.

Cash flow from operations was $30.5 billion in the first quarter compared with $19.9 billion in the previous quarter.

Apple returned almost $25 billion in the reported quarter through dividend payouts and share repurchases. The company repurchased 40 million shares for $10 billion and paid out $3.5 billion in dividends.

Moreover, it declared a cash dividend of 77 cents per share to be payable on Feb 13, 2020, to shareholders of record as of Feb 10.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Apple has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Apple has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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