Apple's revenue is expected to continue to decline, so why are stocks up?


Apple Inc. has recorded a sharp drop in revenue for its holiday quarter. It was not a surprise.

What follows could be. The company has released lower-than-expected sales forecasts for the current quarter, suggesting that the slowdown in iPhone sales could also result in a significant drop in revenue.

Analysts were already expecting a slight decline in revenues for each quarter of the current fiscal year before Apple

AAPL, -1.04%

Tuesday released its forecast for the March quarter, which projected a turnover of $ 55 to $ 59 billion for the quarter, against a consensus of $ 59 billion for the FactSet and a total of $ 61.1 billion for the previous year.

Summary of Live Blogs: Apple's Profits Increase Inventory

This type of downward trend in sales would not generally lead to a rise in shares, but Apple's stock rose more than 5% after trading hours, leaving a question: why?

Wedbush analyst, Daniel Ives, spoke about three reasons during a telephone conversation Tuesday afternoon, starting with the revenue forecast. Although he is below the consensus expectations of analysts, Ives said he was still superior to market fears.

"They feared they could count on a figure of less than $ 55 billion," Ives said.

The other two factors are related to Apple's service activities, which the company insisted on as iPhone sales stagnated. While iPhone revenues have dropped 15% over the last quarter of holiday purchase, software and services revenue increased by more than 19% after normalizing the change in accounting rules of the income. Ives pointed to two specific service information provided by Apple: the gross profit margin and the number of users paying for subscriptions.

See also: How China's slowdown could hurt global economic growth

Services gross margin corresponds to Apple's offer of peace while subtracting unit sales of specific products such as the iPhone, trading on an indicator that would not seem attractive for Apple. Apple said its gross margin for services like Apple Music, iCloud and Apple Pay was 63 percent in the quarter, which, Ives said, was better than expected.

"The profit margin was 60% of gross margins," said the analyst, who outperformed Apple's stock rating with a price target of $ 200. "The service sector may have been something [investors] underestimated in terms of profitability. "

Ives compared it to Inc.

AMZN, -2.69%

stand out from the performance of its cloud computing division, which also provided insights into higher-margin businesses, which were diluted by a much larger base-line business with lower margins.

"When Amazon broke AWS margins, it was a defining moment for Amazon as investors began to give them more credit," he said.

To learn more: Amazon's revenue growth engine has nothing to do with e-commerce

The type of revenue collected by Apple from these companies also makes a big difference. Ives pointed out the large number of paid subscriptions disclosed by Apple, since it is a more recurring source of recurring revenue, a key factor for Apple because the users of the network are not the only ones to be paid. iPhone expects an average longer before buying a new phone.

"We now have over 360 million paid subscriptions in our service portfolio, an increase of $ 120 million from a year ago," said Luca Maestri, chief financial officer, at the conference. phone call. "Given the continued vigor and dynamism of this part of the business, we now expect the number of paid subscriptions to exceed half a billion by 2020".

Water Piecyk, an analyst at BTIG, said a different figure in Apple's forecast, with an overall gross margin of 37% to 38%, indicating that profitability will not decline with revenue.

"The good news is that lower revenue expectations, likely due in part to price declines in some markets, have not translated into low gross margin forecasts, further easing investors worried about the worst," he said. Piecyk writes, while subtracting $ 6 billion in 2019. IPhone sales of its estimates due to the weak forecast. He also reduced his price target to $ 197, from $ 197 to a Tuesday night ticket.

Overall, Apple's increase in inventory Tuesday seems to be a relief, with investors receiving less disappointing news than a dreaded 27% decline in the last three months.

SPX, -0.15%

was fundamentally profitable. However, this type of rally may not last very long, because it depends entirely on Apple's willingness to meet its promises on Tuesday.

"We are now coming to the March forecast and it is imperative that they come to fruition," said Ives, noting the glaring lack of forecast on the holiday quarter that required Apple's intervention. "There is a big problem of credibility in terms of prediction of iPhone sales."

Updated with an additional analyst comment.

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