Apple Beats on Earnings, Justifies Tim Cook's New Year Talk-Down

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After its Q1 FY19 earnings release, Apple, Inc. (AAPLResearch Report) CEO Tim Cook’s strategy is now clear. By lowering everyone’s expectations a month ago, Cook set his company up for an earnings beat rather than a market beating.

Before we look at reviews from the top analysts in TipRanks’ database, here are the main points from Apple’s quarterly report:

  • EPS of $4.18, against $4.17 expected;
  • Total revenue of $84.3 billion, against $83.9 billion expected;
  • iPhone quarterly revenue of $51.9 billion, against $52.6 expected
  • Services quarterly revenue of $10.9, meeting expectations

How AAPL Shares Responded

In a quick reaction, AAPL shares jumped 6% in after-hours trading Tuesday, opening Wednesday at $161 and closing that day at $165, for total gain of $11, or 7%.

For comparison, when Cook lowered the Q1 projections on January 2, AAPL fell just over 10%; by managing expectations, and getting investors and analysts to talk about Apple’s earnings for nearly a month, Cook mitigated the loss and softened the blow to his company and shareholders.

What the Analysts are Saying

Wall Street’s top-rated analysts were quick to chime in after the earnings report. By Wednesday, AAPL stock had received no fewer than 17 new reviews.

From the Bears

None said to sell the stock. Among the bears was Macquarie analyst Ben Schacter (Track Record & Ratings), who took a downbeat view of the company’s near-term potential. Specifically, he said, “We still like the Services business, but expect it will slow and lower-margin businesses (Music, iCloud) will drive more top-line growth, while higher-margin businesses such as App Store and Licensing will slow.” In line with this, Schacter set a $149 price target, suggesting a 9% downside to AAPL stock. Despite seeing a downside, Schacter also set a ‘Hold’ rating.

Andy Hargreaves (Track Record & Ratings), of KeyBanc, sees a “relief rally” in the making, now that earnings have met expectations, but takes a bearish stance toward the rest of the year: “Hardware sales appear likely to continue declining, while Services appears likely to decelerate. This leaves little to drive multiple expansion, in our view.” Hargreaves also gave a ‘Hold’ rating, and suggested a downside to AAPL shares, of 2.5%, with a price target of $161.

Taking the Bulls by the Horns

Taking the bullish side, with a ‘Buy’ rating, Piper Jaffray’s Michael Olson (Track Record & Ratings) looks at the wider picture and sees an uptick ahead for Apple. He says, “With the news turning out not as bad as expected, some investors that had been sidelined will likely re-visit the stock.” Olson gives Apple’s stock a modest upside of 13%, with a price target of $187.

Finally, UBS analyst Timothy Arcuri (Track Record & Ratings) put everything together and came to a Buy-side conclusion: “Guidance was better than feared and [I] remain optimistic because the phone cycle continues to elongate, the worst of the bad news is over for a while, and the company is set to release new proprietary content such as video.” Arcuri gives AAPL a price target of $185, implying an upside potential of 12%.

Apple has too many latent strengths to discount the bulls here. While iPhone sales and revenues are down, the product line still has 900 million users, giving the company a vast pool of potential customers for upgrades, apps, and whatever else the marketing department can dream up. The services segment is growing. And with a market cap of $785 billion, Apple clearly has the resources needed to weather any storm.

There are also rumors of an extensive line of new product releases scheduled for 2019. While Apple’s upper management – as a matter of policy – rarely comments on future releases, industry watchers are expecting a new Apple Watch, new MacBooks and iMacs, and a new monitor screen for that fancy cylindrical Mac Pro. An upgraded version of the affordable iPad Mini is also said to be in the works.

Finally, looking back at those iPhones, don’t forget that Apple has released a new model every year since the line was introduced in 2010. As this past quarter shows, you can’t count Apple out.

A Split Consensus

Apple’s earnings report didn’t change anyone’s mind. There were no unexpected ratings upgrades or downgrades among the analysts. What they did do, was double down on their previous convictions. As a result, AAPL holds a ‘Moderate Buy’ rating from the analyst consensus, based on 17 ‘buys’ and 20 ‘holds.’ The average price target, $180, suggests a 9% upside from the current share price of $165.

The Last Word

Well-known Apple bull Jim Cramer, of CNBC and TheStreet, summed everything up in his inimitable style, right after the earnings report on Tuesday evening: “The news simply wasn't horrible enough to sate the bears. In fact, the stock is trading in after-hours above the pre-announcement price… There just isn't that much risk now after we got the high sign on the January numbers.”

Author: Michael Marcus. This author currently holds a long position in Apple, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Earnings , Investing Ideas , Stocks , Technology
Referenced Symbols: AAPL

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