Image: Apple’s (AAPL) shares have soared since the beginning of this year. We have maintained our fair value estimate of $222 per share following its fiscal second-quarter results, released April 30.
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By Brian Nelson, CFA
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On April 30, Apple reported better-than-expected fiscal second-quarter results. Headlining the press release was that “services revenue reach(ed) a new all-time high of $11.5 billion.” As is the case of many services business, this revenue is higher-margin and recurring, and we see only upside as Apple’s ecosystem continues to flourish. The company’s installed base is now over 1.4 billion users.
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We have maintained our fair value estimate for Apple’s shares of $222 following the release of the report. In fact, our fair value estimate has remained above $200 per share since December 2017 (that’s 14 months ago). Enterprise (universal) valuation matters, and acts as a magnet to share prices, while momentum acts as an accelerator. We did our best to reiterate what matters in the Apple story, and we think a laser focus on intrinsic value estimation will continue to be the key.
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Although revenue dropped more than 5% on a year-over-year basis during the period, the $58+ billion mark beat expectations, and Apple’s fiscal second-quarter GAAP number of $2.46 per share came in a dime better than consensus, but off 10% from the year-ago period. The iPhone maker’s results will always be lumpy, as product cycles ebb and flow, and we reiterate that product cycles are already embedded in future expectations of financial performance, and therefore any intrinsic value estimate. Don’t worry about them — they work themselves out over time.
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Commentary in the press release was also quite reassuring. CEO Tim Cook noted that the March quarter delivered the strongest iPad growth in 6 years, and it’s hard to simply dismiss his excitement about Apple’s pipeline. He hasn’t let shareholders down, and many are expecting some exciting developments at the company’s annual conference in June. Not only was the press release upbeat, but Apple issued a fiscal third-quarter outlook that was better than what many had been anticipating.
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We’re sticking with Apple in the Best Ideas Newsletter portfolio, and we’re sticking with shares in the Dividend Growth Newsletter portfolio. Apple upped its dividend 5.5%, to a quarterly rate of $0.77 per share, suggesting a forward dividend yield of about 1.5%. That yield may not entice a lot of investors, but it is backed by a huge net cash position on the balance sheet and free cash flow generation that may very well be second to none. We continue to like Apple, and yes, enterprise valuation matters.
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Please let us know if you have any questions.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.