Wednesday, July 22, 2015

Apple Earnings: Investors sell on earnings beat

Apple is opening today down 6.5% at around $123, lower then yesterday's $130 pre-earnings close. Hearing this, one might think earnings were disappointing, yet the opposite was true. Revenue and earnings were higher than expected (Q3 earnings per share estimate was $1.81, Apple reported $1.85 , revenue estimate was $49.43 Billion and Apple reported $49.6 Billion) These were high expectations to begin with, with many analysts ratcheting up estimates in the lead up given Apple's record with earnings beats, and Apple still beat. This steep drop in stock value seems to be investors disappointed that Apple didn't beat by much more, which doesn't appear to be very rational. I will go over each product category and why I think that Apple is poised for more growth and is a buy after this current sell-off.

Iphone
Everyone was focusing in on this product, would sales slow down from it's incredible speed. Apple sold almost 50 million Iphones in the quarter, with sales jumping by 35% year over year. This at a time when when many people might be holding off to buy the newer Iphone 7, which will be announced in September. Where is the problem? Numbers on the Iphone continue to impress, growth in China continues to impress, users continue to upgrade to the newer model, and Tim Cook claims this quarter had the most people switching from Android to Iphone ever. Consumers have chosen the Iphone as the prized mobile phone.

Apple Watch                          
Getty Images

This is one area where many investors are getting anxious for immediate results. Apple has yet to release sales data for the watch, though Tim Cook said that sales have "beat internal estimates". That sounds good to me, and before launch most investors were saying the watch had zero impact on the bottom line anyway. Now everyone is worried that the watch is not taking off. This is a product line that won't explode like the Iphone, it's an entirely new category with an entirely different objective. Though Tim Cook said sales of the watch were higher in June than in the previous two months, so the watch could already be gathering speed. Wearable technology will grow, albeit steadily. The apple watch will benefit from that growth, and at an average price of $600 per watch, this product line will have a sizable revenue in the future. Investors seem to be short sighted on this, wanting big gains now. Maybe people are spoiled from the massive success of the Iphone. Time will tell.

Mac Sales

Sales of the laptop grew by more than 9%, at a time when PC sales are falling around the world. Investors seem not to care about this, but this development shows that people are investing in the ecosystem. A phone, computer, watch, TV, all will go together. The cost of switching one or the other goes up the more Apple products you have. With Tim Cook speaking about android users switching to Iphone, it becomes a matter of time before they also ditch a windows computer for a Macbook.

Ipad Sales

Sales slumped here again. To me, this is a niche product, it's a convenience, especially with phone screen size increasing. If someone is invested in the ecosystem, they might purchase this for their daily commute or for work. Households may purchase an Ipad for their children, however Apple continues to push for businesses to adapt Ipads. This might continue, with some cash registers switching over to Ipad use. However, I don't see this category blowing out expectations anytime soon. That's just fine with me, with yearly improvements, the Ipad isn't going away, it just isn't going to grow like the Iphone.

Apple Pay

Barely even mentioned, Apple Pay has just launched in the UK. Another new innovation that more and more people will continue to adapt around the world. The ecosystem for Apple is growing, and the watch will make Apple Pay even more viable, allowing users to purchase items by just holding out their arm. It's just another reason to own the watch or Iphone. Small innovation can go a long way.

China
Investors also seem worried about growth in China given the recent stock market collapse there. Yet overall sales more than doubled in the region, and Tim Cook continued to be optimistic about further increases in sales, as the company plans to open more stores there. As the WSJ pointed out Iphone sales in greater China rose 87%. That hardly appears to be a slowdown. No one seems to speak about the network affect as well, as more people in China purchase an Iphone, it becomes more valuable and more wanted due to network effects.

Conclusion
Apple continues to print money from it's ecosystem, especially the Iphone. With over $200 Billion in cash, a stellar product line with continued innovations, the company is positioned well for future growth. Not to mention the stock is trading at a discount relative to the rest of the market with a P/E around 15. I recommend AAPL as a buy here, I see no major slowdowns in Iphone sales which worries many others. The watch will continue to catch on, along with improvements in the Apple TV and possibly even an Apple car ecosystem down the road, this company will continue it's dominant growth in the tech industry. Buy low, sell high. Now is the chance to get it low.