How to confuse a function with its first derivative.
From “The Risks to Apple Are Rising, So Why Are Investors So Bullish?” in this week’s issue ($):
[Apple’s] stock now trades at 16.4 times projected earnings for the next 12 months, well above its five-year average of 13.7 and near a five-year peak of 17.7. Investors have been paying up for the stock on the idea that Apple is moving away from its hardware focus toward a more predictable services- and software-driven model.
The problem is that Apple’s services business remains a question mark and could still disappoint. The segment actually missed analyst estimates by $200 million in the June quarter, with sales up 13% year over year, versus 16% in the prior quarter.
Moreover, KeyBanc Capital Markets Andy Hargreaves expects Apple’s services growth rate to subside over the next year. “Services business is tied to growth in the user base,” he says. “And the user base is definitely decelerating.”
My take: Decelerating, sure, but still growing (see interactive chart below; not seeing? Try here).
So what, again, is Apple’s Services “problem”?
See also: How Apple plays the Ecosystem Game
Man bites dog.
Glass half empty.
No the metaphor used, this is worthless tripe.
Thanks for the YoY growth view, Philip. 10%+ growth in user base is excellent. For a 40 year old company, its miraculous. More so, considering that Apple does not grow its market by acquisition. (Beats products provided new products to the existing users.)
@ Fred:
It’s not just Apple’s age that is “miraculous”, but the sheer size of Apple’s user base that’s growing at 10%/annually.
Phenomenal also works.
Off topic, but clearly Apple is taking more of a pounding today than most tech stocks, although nobody seems to be coming away unscathed.
The interesting thing is that this is all about the dollar’s strength. Apple didn’t clear as much money last quarter due to that, and this move looks to make that worse going forward due to China’s decision not to support their currency.
But there was no attack on Apple by China, so this big drop appears to be an over-reaction to me. Still, over-reaction is par for the course when it comes to AAPL….
BTW, after Apple’s 10-Q came out with the real share count as of July 28 (4.531 B), I calculated the “real” EPS (yoy net income divided by the share count). That came out to (64.423 B/4.531B=) $14.217/share, and dividing that into the price right now of ~$193.50/share gives us a “real” P/E ratio of (193.5/14.217 =) (drum roll) – 13.61. Yikes! Note that this is appreciably lower than the P/E presently showing on Yahoo Finance of 16.48 (TTM). Yahoo uses the “averaged and diluted” shares of AAPL to calculate it’s P/E, which fails to properly account for Apple’s massive stock buybacks.
I prefer the real number, which is a staggeringly low valuation. As a dedicated Apple long-term investor, I am SO THANKFUL that Apple is buying back these obscenely undervalued shares hand over fist!
Apple’s 10-Q filed with the SEC says they have 4,601,380 (in thousands) diluted shares, ending July 29. Diluted shares are what are used for earnings. All convertible securities *must* be used.
“Apple Shares Outstanding 2006-2019. AAPL. Apple shares outstanding for the quarter ending June 30, 2019 were 4.601B, a 6.6% decline year-over-year.”
Below is copied and pasted FROM the 10-Q:
Shares used in computing earnings per share:
Basic 4,570,633
Diluted 4,601,380
@ Dan:
“Apple’s 10-Q filed with the SEC says they have 4,601,380 (in thousands) diluted shares, ending July 29. Diluted shares are what are used for earnings. All convertible securities *must* be used.”
Not quite accurate. Averaged
AND diluted shares are used for earnings. That’s a large difference in AAPL’s case.
Let me explain:
First, as you correctly pointed out last time, “Diluted shares are common shares plus employee stock options and every other convertible security. Apple pays dividends on those diluted shares and they are subtracted from profits.”
The problem is, THEY WON’T DILUTE the share float! Why? Because Apple is buying back far more shares a quarter than the share float is grown by stock options, etcetera.
Second, “averaged” means that they sum up the published “averaged diluted” share count at the end of each quarter, sum them, and then divide by 4. In Apple’s case, that vastly overstates the number of shares outstanding. A far more accurate way to determine EPS is to sum the year over year net income and then divide by the “real” stock count. If Apple suddenly stopped buying back shares and it’s net income went perfectly flat, after 4 quarters you’d see the two ways of calculating become perfectly synced.
That’s why I say that the number to use is the “real” EPS, which can only be found when we get access to the 10-Q and see how many shares are actually outstanding. Which is 4.531 B at the end of the last quarter.
Think of it as shooting at a moving target, and always shooting behind because you don’t account for the time that the bullet takes to travel from the gun to the target.
Now, MOST companies don’t have this issue, because they don’t buy back their shares in huge quantities on a consistent basis. So for them, using an averaged and diluted share count works just fine.
But, as in so many other ways, Apple is not “most companies”.
Finally got around to reading your OT post on ‘real EPS”. Nice.
Still, Apple, and more so AAPL, is vulnerable to macro factors, If miscalculation leads to trade war.
A casual reading of history shows that countries, and their leaders, under real or perceived threats, fight back hard – enduring harsh consequences.. History also shows many cases of first strike proving fatal to the initiator.
@ Fred:
“Still, Apple, and more so AAPL, is vulnerable to macro factors, If miscalculation leads to trade war.”
I’m not so sure. Apple cleared $64 B over the last year. Here’s the last 4 fiscal years’ net income:
59.531 B – fy ‘18
48.351 B – fy ‘17
45.687 B – fy ‘16
53.394 B – fy ‘ 15
Apple took a 7.7 B hit in fy ‘16, and it didn’t faze it. It’s profits have grown $18.7 B since then.
It hasn’t yet been proven to me that Apple stands to get even moderately damaged over this trade war.
i came away unscathed Joe. in fact, i’m up 30%.today.
now, regarding decelerating services. myopic. #af.
on the eve of introducing a physical payment method, this will look stupid in a years time.
dumb dumb analyst.
So, Vic et al, how low are we going this time? Will AAPL and the rest the market work it’s way down to another 12/24/2018? Or are we just doing the 1Q dance and stop around -15-25%?
hey aaron,
i’m expecting a ppt djt tweet before market opens.
unlike most analysts, i’m sticking to my 180 eoy target. but i’m happy buying here, esp after seeing card possibly being rolled out this week. so, i think they’re might be another 5% down but we’re closer to the bottom than the top.
everyone’s missing services.
Agreed on the missing Services part.
Lots of dollars there to get sucked up. TV+. Arcade. Factor in the install base.
All of Apple’s purchase/supplier contracts are USD denominated. With China’s devaluation of the Yuan today an investment in Hon Hai might be very prudent.
Also, much has been said/written about Xi playing the “long game” as though he can. Frankly, when comparing the reciprocal trade import to the US and China, China is at an extreme disadvantage.
US purchase of Chinese goods accounts for about 5% of China’s GDP, while Chinese purchase of US goods accounts for less than 1% of US GDP. China depends on GDP growth of about 6% per annum. Without US trade that growth rate is severely impacted, which in turn severely impacts China’s expansionist objectives.
A prolonged trade war is going to negatively impact China 5X more than it will the US. Consumer impact will be a case of perception as US news reporting focuses on (and exaggerates) the negative, while China’s news is heavily curated by the government to minimize the negative.
Trump, rightly or wrongly, has extended the imposition of tariffs twice to encourage a trade agreement. Neither extension has brought about an agreement, ergo, I do not think Trump will back down on implementing tariffs in the future unless and until there is a signed agreement in place. Even then, in the future, I think he will pull the trigger quickly if the Chinese don’t follow through on the agreement.
As an aside, I went shopping over the weekend for a few items. I checked the “Made in…” label (something I never bothered with in the past) and made a conscious decision to avoid anything made in China. I was surprised at how few of the items I shopped for was made in China. Vietnam, Malaysia, and Mexico led the non-US list.
If India was smart (not sure they are) they would be aggressively taking advantage of this trade conflict to encourage Indian manufacturing. The business environment is ripe for a move out of China to anywhere without a geopolitical goal of domination.
@ Gregg:
All true. Unfortunately, that won’t help support AAPL in the short run, and that’s the way most investors invest. Thankfully, Apple’s cash allows them, like smarter investors, to play the long game and buy back large amounts of their incredibly cheap yet incredibly valuable stock.
“If India was smart (not sure they are) they would be aggressively taking advantage of this trade conflict to encourage Indian manufacturing. ”
This one sentence alone earns an upvote.
BTW, share volume is interesting today. Looks to be less than 50 M shares. That’s not much considering the better than 5% drop in AAPL’s price. Not for a stock with a float of 4.5 B shares….
52 M shares traded hands. A smidge higher than I expected. After hours, the shorts rule. Apple down another $6 as I type.
i think our domestic issues ironically gives both men the opportunity and optics to put ego aside and come to a resolution.
between hong kong and domestic terrorists, both men and nations have much bigger fish to fry.
Hope your right on the bigger fish comment, Victor.
Trump also will be feeling pressure on the farmer vote. I think that he really needs to fix the agriculture boycott part of this, and soon.
“Trump also will be feeling pressure on the farmer vote. I think that he really needs to fix the agriculture boycott part of this, and soon.”
The US should out agriculture as an import offset.
The only profits made in US agriculture are derived from government subsidies, ergo we are shipping US tax revenue overseas and claiming the sale as income that offsets foreign imports.
What’s worse is that the US government must borrow to “balance” it’s revenue and expenses. Much of that borrowed cash comes from foreign governments, which means we are borrowing (paying interest on) in order to subsidize shipments of US agriculture overseas. And for those countries that can’t afford the heavily discounted price of US agriculture we give them grants and very low interest loans (that are mostly written off 5-10 years later), all to support a virtually non-existent “family” farmer.
In the meantime US subsidized agriculture prevents poor(er) nations from competing on the open market, perpetuating their poor status.
Whet do this subsidies get the US consumer? Politically motivated advancement of specific food that are destroying the health of the American people. By that I mean corn (corn syrup), sugar beets and sugar.
Fifty years ago there was virtually no instances of adolescent Type 2 diabetes. Today it’s an epidemic, all caused by the “non-fat” people (non-fat tastes terrible until you add sugar) and the proliferation of sugar enhanced foods. Sugar is known by many different names, but is always a carbohydrate.
Agriculture as a trade issue is a farce and always a shell game that benefits a very few at the expense of the very many.