Apple Shares Continue making Shareholders Proud

Apple reported very promising results for Q3 2018. Factoring in the results into our model, we increased our price target from $190 to $208. However, we changed our stance from Overweight to Hold.

Given its revenue base and size, Apple's recent growth has been impressive. However, with 80% of the company's sales exposed to secularly challenged businesses, we believe the long-term growth outlook remains limited.

We continue to see support for the shares from the company's substantial share buy-back, however, with positives and negatives largely balanced at current levels.

The main highlights from Q3 2018 results

During the quarter, management has increased spending, focusing on content and emerging markets.

• iPhone pricing –iphone revenue increased by 20% year-on-year, thanks to ongoing momentum for iPhone 8/8+ and X;

• Services and Other products – These continued to generate 30%+ growth. The company feels positive about the Services momentum, which is set to double 2016 revenue by 2020.

o Apple Music grew 50% year-on-year.

o AppleCare revenue grew at its highest rate in 15 quarters.

o Cloud services revenue up 15% year-on-year.

o Apple Pay had over 1 billion transactions during the quarter, and is entering Germany later in 2018. Apple Pay transactions last quarter exceed Square and PayPal.

o Wearables – Apple Watch, AirPods, and Beats – report outstanding results, reaching $10 billion in revenue over the last four quarters.

• China – Double-digit revenue growth in Greater China for four straight quarters;

• Cash – Apple now has $243.7 billion in cash on hand. This is $23.5 billion lower from the $267.2 billion it posted in the March quarter, when Apple announced a $100 billion buyback program and a 16% dividend increase;

• Tariffs – None of the Apple products have been directly affected by tariffs, but the company is evaluating the impact from latest round of proposed tariffs;

• iPad – iPad momentum is fading (+1% growth in units year-on year and revenue declined 6% year-on-year)

• The Mac – declined 13% ahead of product transition

• Apple Watch and AirPods – Demand for both remained strong, with wearables up 60% year-on-year.

Dividends

A dividend of $0.73 per share was declared on the company’s common stock.

Share Repurchase Program

During the third quarter, the company repurchased 112.8 million shares of its common stock for $20.0 billion, in connection with two separate programs. $10.4 billion of this amount was repurchased under the previous share repurchase program of $210 billion, and thus completing the program. The remaining $9.6 billion was in connection to the new share repurchase program of up to $100 billion, announced in 1st May 2018.

Guidance

• Revenue between $60 billion and $62 billion.

• Gross margin with the 38-38.5% range.

• Operating expenses not exceeding the $8.05 billion mark.

Valuation

Our $208 12-month price target factors in a discount rate of 10% and a forward Price-to-earnings multiple of 17x.

We are forecasting gross margins of 38% in 2019 and 2020. Our model also reflects an income tax rate of 15% going forward.