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Apple profit warning/ App Store spending update

09 January 2019

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by Anchor

On Wednesday (2 January), Apple surprised investors by saying that iPhone sales missed expectations for the holiday quarter (1Q19) and revenue would be 7%-plus lower than it had expected. The firm now forecasts the following:

Revenue of c. $84bn (vs $89bn to $93bn previously);

A gross margin of c. 38%;

Operating expenses of around $8.7bn;

other income/(expense) of approximately $550mn; and a

tax rate of c. 16.5% before discrete items

CEO Tim Cook attributed all of the revenue shortfall to lower-than-anticipated iPhone revenue, particularly in China, where a slowing economy and the trade war have hurt sales. Cook wrote that, “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,”. Around 20% of Apple sales come from China. Other issues this quarter which Apple raised were, difficult comparisons due to iPhone launch timing, a strong US dollar, supply constraints, weaker-than-expected iPhone upgrades, fewer carrier subsidies artificially reducing the sticker price of a smartphone a programme in which Apple replaced iPhone batteries for $29.

Apple lost more than $75bn in market value following the announcement, closing 10% lower on Thursday, 3 January. We note that c. three months ago Apple was the most valuable company in the world, but c. $450bn has been wiped from its value since October (this equates to more than the total market cap of Facebook). Apple hit a peak of $232.07/ share on 3 October (giving it a $1.12trn market cap) but has since dropped to $150.75 as of Tuesday’s (8 January) close, when its market cap stood at $715.37bn.

In other Apple-related news, Apple said last week that App Store spending topped $1.22bn between Christmas Eve and New Year’s Eve – a new holiday spending record for the company. Customers reportedly spent over $322mn on New Year’s Day alone.

Apple is trading at a 12.4x 2019 EPS multiple and has a $130bn net cash position, with Barron’s noting this week that  “Assuming Apple’s multiple returns to its 13.6 average, the stock is worth $166.46. Add back $27 in net cash per share — a logical step given that Apple has finally promised to bring its cash position to zero – and Apple is worth $194,” –  29% above yesterday’s close.

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