Apple Earnings Notes For Investors

Apple is a company like no other. With $180 bil of net cash to be repatriated and the largest divided and capital return program in business history, along with a below market PE multiple and half the PE multiple of its tech peers. Apple is a prime bargain, we also know Warren Buffett thinks so too as he has been steadily acquiring shares. Not to mention this is not a company with flat growth or really any issue, this is a growing company with earnings estimates of 24% earnings growth this year. What will they do but it’s time for apple to “Show Us The Money!”

The issue is the iPhone which brought the company to dominance over the last decade. As smart phone growth has finally peaked apple is stuck in a permanent replacement cycle. The solution Apple chose was to make a higher end premium phone, the IphoneX to bring up ASP. The X was never meant to be the main selling phone. Currently the iPhone 8 is. With several prices points, sizes and colors Apple is trying to get you to replace your old phone. Fact is the phones are too good and what was a one to two year replacement cycle is lasting a lot longer. Apples problem is a good problem to have but investors need to accept the future growth leg of apple will not be from device growth. This is ok as we’ve moved from a hardware story to a services story.

Apple now has our life on iCloud, our music Apple Music and shows and movies on iTunes and all the apps and games in the world on the app store, they get a little money off of its huge user base every month. Apple services is where they are investing in video programing as well. Services with the IOT is a huge opportunity that Apple has lagged behind Nest and Google but can still catch up. Security services as well as gaming are areas they can continue to grow revenue from the goldmine App Store. Services is also very high margin as most of Apple is. We love this business as it is a very loyal user base and leaving the Apple ecosystem is like being banished to the hinterlands. As Apple pushes into video, we shall see the quality of their work. We think they are doing some very good projects. Apple will continue to build out services enhancing the reoccurring revenue potion of their business.

Other products like the apple watch, Apple TV and AirPods are doing very well. Finally! People are buying these high margin products. We are seeing people everywhere adapting the weird white earphones with no chords. The cyborg people are now the norm (although I refuse to look that way). Apple watches and TVs are becoming the norm as well and still have huge room for more adoption, Apple can also grow this with Beats and more speakers and home theater options. Many things apple currently has in the store but is not owned by them. Some key acquisitions, like sonos, would help them build out the home offerings.

Ultimately Apple is a mature company but one with many great things going for it. We certainly like it at this price and feel it has lots of ways they can go to enhance growth, not to mention maybe buying some Tesla so they don’t miss the self driving electric car theme which we expect to be a major theme over the next decade. Maybe flip Elon a few bil…

Apple technical and fundamental information provided by Investors Business Daily and MarketSmith #IBDPartner

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki Inc., a SEC registered investment advisor with approximately $725 million in assets under management. Gerber Kawasaki clients, firm and employees own positions in Apple. Readers shouldn’t buy any investment without doing their own research to determine if the investments discussed are suitable to their situation. All investments have risk. Please contact us if you have any questions or wish to speak to an advisor.