On AAPL’s Multiple: Trading at 50% Off
The Street’s obsession over iPhone units has distracted investors from the fundamentals and weighed heavily on AAPL’s multiple.
· The company’s recent decision to end the reporting of hardware unit numbers should help focus investors on what matters most: revenue and earnings growth.
· Second to revenue and earnings growth, trends in hardware and Services margins will impact AAPL’s multiple.
· While it will take a year or more, we believe this reporting change should raise Apple’s multiple, potentially 2x higher, to be more in line with other predictable and growing businesses.
20 & 40: Key Metrics Nobody’s Talking About
I’ve covered Apple for a long time and have always tried to center my investment opinion on a 2-5 year view while being vigilant that quarterly unit sales are the building blocks for the long term. Over the years, the Street’s focus on units (Mac, iPod, iPhone, and iPad) has intensified. Over the past 3 years, this focus has largely blinded investors to the most critical investing metrics: revenue and earnings growth.
I’m guilty of falling into the unit trap. It took me 5 days to realize the company grew revenue 20% y/y and earnings 40% y/y in the Sept. 2018 quarter, despite Apple highlighting those data points 3 times on the earnings call.
Evidently, the Street also missed the impressive revenue and earnings growth, as the stock fell almost 10% following the Sept. quarter earnings call, and the narrative has been dominated by a 1% miss on iPhone units and guidance 2% below consensus (due to timing of new phones, production, and emerging markets). A negative view of the company’s new unit reporting methodology is also depressing shares. Investors that rely on unit visibility argue that this change only masks declining units sales.
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