Company Overview: Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company's segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company's other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings.


AAPL Details

While many investors believe that the tech giant, Apple Inc. (NASDAQ: AAPL) seems to be an out of favor stock, the recent series of events as planned with past performance in challenging environment demonstrate a different dimension to this thought. The group’s performance seems to be lately impacted by the iPhone sales, however, AAPL is still building on the capability across its ecosystem with support being experienced from its services’ division and new launches expected to kick-off the growth trajectory once again. The services offerings can still be incentivized through an array of new devices. Looking from valuation perspective, wherein price to sales ratio for trailing 12 months and five year average is lower than the median and peers, the stock looks to be in an undervalued zone. The group’s efforts and many considerations indicate towards value generation along with buy-back program in place and decent returns for shareholders. Overall, the stock is expected to proffer returns in long term post streamlining the present scenario. It is expected that the group would be able to manage double digit figures for gross margin, EBITDA margins and return on equity on a quarterly basis.


Return of Capital and Net Cash Position (Source: Company Reports)

Expecting value enhancement through launch of New Services: Apple Inc. is holding a press event in Cupertino, California, on 25^th March, where the company is expected to launch a new streaming TV service and magazine subscription service expected to add more value to the existing portfolio of the company. Apple‘s entry into TV streaming is expected to be a game changer as it holds a leading position in smartphones and currently the growth of video & TV streaming on mobile could accelerate strong growth in the services. Initially, the company was expecting to launch television streaming service in April, and it’s been generally experienced that the company launches its products and services in the weeks after an event. The company hit the headlines lately by bringing in the tag, “It’s show time”, which has accelerated the probability of the launch of services. The market is expecting that the new streaming TV service may increase the annual revenue in the range of $7 billion to $10 billion and would significantly increase the valuation of the stock. As per the analysts’, the streaming services will be of valuation of approximately $400 billion for the company, which means that it could prove to be “highly profitable”, which is expected to add revenue of $50 billion by 2021. AAPL had initially planned to invest $2 billion in Hollywood for the production of its own content and had planned to sign big stars such as Oprah Winfrey. AAPL expects its TV streaming services will reach the target of 100 million subscriptions over three years as the company plans to launch the service globally. AAPL may distribute its new service through Apple’s App Store, which is used by people in more than 100 countries.

AAPL had projected that the total App Store subscriptions will reach to 500 million by 2020, which is up from current figure of 360 million. This new service is expected not to include Netflix or Hulu. During the TV streaming launch, it is expected that the company will use most of the shows and movies from outside suppliers, the subscriptions from CBS Corp, Viacom Inc and Lions Gate Entertainment Corp’s Starz and will also make the original content. The market is expecting some deals before the end of this week. Most of AAPL’s own movies and TV shows are in the stage of development, and the company is planning the first release to be later in the year 2019 at the earliest. Further, the company initially plans to provide iPhone and iPad owners, the access of free original shows and also the option to subscribe other streaming services. Further, the company is also planning to launch a News product, which will provide services from major news outlets in a single monthly plan through subscriptions. This new Apple News product will be based on the app Texture, which is "Netflix for magazines" app that the company had acquired in 2018. This new offering is being tested for months by the company’s employees. Magazines will form an important part of the Apple News app. This is getting redesigned that will have a new icon as part of the iOS 12.2 software update, which is also expected to be announced at the upcoming event on 25 March. AAPL could use the event for laying the groundwork for an iPhone credit-card partnership with Goldman Sachs Group Inc. The credit-card project is code named as “Project Cookie”. Meanwhile, AAPL plans to sell its video and magazine services separately, but the customers could get the offer of a discount to users who will subscribe to more than one service. Meanwhile, AAPL is expected to announce a new 10.2-inch iPad which may replace its standard 9.7-inch iPad some time in 2019. The company may use the event to show the demo of streaming of video and news services work on the new iPad.

Transfer of Debt Securities’ Listing: AAPL has now planned to transfer the debt securities (Euro and Sterling denominated) from the New York Stock Exchange to Nasdaq Bond Exchange; and this will be done from March 14, 2019 after the market is closed. The debt securities have been expected to commence trading on the Nasdaq Bond Exchange from March 15, 2019; and the planned transfer of the listing of the debt securities to Nasdaq is expected to strengthen and consolidate the US equity and debt listings under one platform (i.e., one exchange).


Performance for Key Metrics (Source: Company Reports and Thomson Reuters)

Aiming to demonstrate Resilient Performance in challenging time: AAPL’s stock fell after the company had posted a decline in revenue and profit for its first holiday-quarter (December Quarter) in more than ten years. The company had also warned its investors, about the slowdown in its core iPhone revenues which is due to the weakness in China that had affected the company this year. As a result, Apple had already slashed the guidance for the first quarter of FY 19. AAPL for the first quarter of FY 19 has reported 4.5 percent decline in the adjusted revenue to $84.31 billion. Its iPhone sales fell 15% in the quarter to $51.98 billion from $61.1 billion a year earlier as the customers do not want to pay up for iPhones, for which the price has risen by more than 50% in recent years to nearly $1,000. The demand for the iPhone XR, which is a lower-priced option was released in October, has now fallen short of the company's expectations. This has forced the company to reduce its production. The iPhone demand had fallen particularly in Greater China, where the company’s total sales declined by 27% to $13.17 billion.


First Quarter 2019 Products and Services’ Performance in millions (Source: Company Reports)

However, for the first quarter of FY 19, the company has delivered 19% rise in the total revenue from all other products and services.  The company has posted 19 percent growth in the Services revenue, which had reached  to an all-time high at $10.9 billion, up over the prior year. It has reported 9 percent and 33 percent, respective levels of growth in the Revenue from Mac and Wearables, Home and Accessories, which had also attained all-time highs. The revenue from iPad has grown by 17 percent during the first quarter. AAPL has attained all-time revenue records in several developed geographies, that included the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea. While the company had experienced challenges in some emerging markets, other countries had also attained records, including Mexico, Poland, Malaysia and Vietnam. AAPL’s total active devices have increased 8% last year to 1.4 billion during the first quarter, which is all time high and the company has posted strong earnings per share of $4.18. This is also all time high for earnings per share. Moreover, during the first quarter of 2019, the company has posted the product gross margin of 34.3% and the services gross margin of 62.8%. On a sequential basis, there has been an expansion of 60 basis points in product gross margin given the positive leverage from the holiday quarter. This, however, was partially offset by cost linked with launch of several new products and impact from foreign exchange. There was a 170 basis points’ rise in services gross margin on a sequential basis, given the favorable mix and leverage; but this was again partially offset by foreign exchange. On the other hand, AAPL’s total company gross margin fell by 30 basis points in view of the different mix between products and services. Despite the challenges at hand, the company attained a net cash position of $130 billion; and plans to attain a net cash neutral position over time.


Assets Scenario (Source: Company Reports)

Future Outlook: For the March 2019 quarter, AAPL expects the revenue to be in the range of $55 billion to $59 billion, which is below the average consensus estimate of $59.98 billion; however, is still a decent figure given the turbulence witnessed at multiple fronts. The number of iPhones to be sold in the March quarter has been expected to fall as per the market estimates, while services’ segment is expected to witness decent performance. For 2Q of FY19, gross margin is expected to be between 37 percent and 38 percent. The operating expenses are expected to be between $8.5 billion and $8.6 billion, while other income is expected to be of $300 million with tax rate to be of approximately 17 percent.

Stock Recommendation: AAPL stock is trading at a price of $181.71, and has support around $142 level and resistance around $184. The new services of TV streaming, news app and iOS 12.2 software update will be the first few of major additions to the portfolio that the company has planned for users since the company launched Apple Pay in 2014 and Apple Music in 2015. The valuation of the company is expected to increase significantly with these new services. With the catalysts at hand, there is an expectation of breach of the resistance level that can take the stock up the price ladder. Looking at prevailing price levels, we give a “Buy” on AAPL at the current market price of $ 181.71.
 

AAPL Daily Chart (Source: Thomson Reuters)

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