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Apple share price: What’s the forecast after strong Q1?

While Apple posted a better-than-expected holiday quarter, not everyone is on board the hype train just yet.

Source: Bloomberg

US technology company Apple Inc's share price has risen 1.51% in extended hours trading, following the release of its Q1 earnings for FY2020.

Higher-than-expected iPhone revenue

Earnings for its first quarter, the three-month period ending December 2019, came in at US$4.99 per share on group revenues of US$91.8 billion.

This not only represents an increase of 19.4% in earnings per share (EPS) from the same quarter in 2019, and an improvement of 9% in group revenues from Q1 FY 2019; it also beat analyst EPS estimates of US$4.55 by 9.7%.

Much of this outperformance has come on the back of ‘strong demand’ for the company’s latest iPhone 11 and iPhone 11 Pro models, said Apple CEO Tim Cook. iPhone revenue for the quarter was US$55.96 billion, versus US$51.50 billion expected.

Revenue for Services, the company’s other highly-touted business division, however, turned in a performance of US$12.72 billion for Q1, falling behind market expectations of US$12.98 billion. Still, this is a year-on-year increase of 17% and marks a record for the sector.

Services takes into account subscription-based software offerings like iCloud, Apple Music, Apple Arcade and the newly launched Apple TV+.

The board of directors also declared a cash dividend of US$0.77 per share of the company’s common stock (consistent with the previous three quarters), payable on 13 February 2020 to existing shareholders.

What does this mean for the rest of FY2020?

Cook said the holiday quarter saw Apple grow its active installed base of devices to over 1.5 billion in the respective geographic segments. He sees this trend as a ‘great driver’ of growth ‘across the board’.

On that note, Apple has provided the following guidance for its fiscal 2020 second quarter:

  • revenue between US$63.0 billion and US$67.0 billion (representing a year-on-year increase of at least 8.6%)

  • gross margin between 38.0 percent and 39.0 percent (roughly on par with Q2 FY 2019)

  • operating expenses between US$9.6 billion and US$9.7 billion (a 14% increase from the year prior)

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The company did not provide any forecast by division in its official statement, but with wearables and services hitting record double digit growth numbers this quarter, much of the attention will remain on those two emerging sectors.

Following the earnings release, Cook had told Reuters that the global release of Apple TV+ in November was a ‘rousing success’, evident by ‘both the people that are getting it in the bundle and the people that are paying for it that haven’t bought a new device’.

He did admit that the company was unable to meet the overwhelming demand for the AirPods and Apple Watch Series 3 in Q1, but added that ‘we’re working on both of those very hard’.

Where next for the Apple share price?

Apple’s share price has more than doubled since January 2019, thanks to a shift in business strategy to focus on services and wearables.

Where its share price is headed next is dependent on how well the software services division continues to do, amidst ever-present threats of global uncertainties, such as the new China coronavirus which has rocked markets globally. Apple is not spared from the financial impact of the virus either, with China, Hong Kong, and Taiwan accounting for over 16% of its total revenue.

The company has forecasted ‘a stronger Q2 than analysts predicted, but the fact that the coronavirus is spreading in unpredictable ways in China, where Apple has most of its hardware built, could upset this optimistic forecast,’ said eMarketer principal analyst Yoram Wurmser.

But with the revenue trajectory of Services ‘on target’, as noted by Hal Eddins, chief economist for Apple shareholder Capital Investment Counsel, Apple equity proponents are feeling as bullish as ever.

Gene Munster of US venture capital firm Loop Ventures is confident that Services and Wearables are on track to forming at least 30% of the company’s total revenue this year. He last indicated a share price target of around US$465 on 10 January.

Not far behind is famed Apple bull and Wedbush analyst Dan Ives, who last week raised his price target from US$350 to US$400 on the stock, on the reasoning that the company is experiencing resurgent demand for the iPhone thanks to a growing ‘magnitude of the 5G upgrade cycle’.

Yesterday, Japanese broadsheet The Nikkei also reported that the company planned to increase iPhone production for the first half of 2020 to 80 million units, an increase of 10% from last year.

However, others like Nomura Instinet researcher Jeffrey Kvaal, believe the 5G cycle-based bull case is overstated, stating that ‘the incremental utility to the consumer seems limited’ as ‘consumers can already consume as much video as they would like and new 5G applications seem some distance off’.

Atlantic Equities’ James Cordwell dropped his rating on Apple shares to ‘underweight’ from ‘neutral’ recently on the basis that any tailwinds from the deployment of 5G technology ‘is now more than fully priced in’.

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