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AAPL Results Show Return To iPhone Growth With iPhone11, Coming 5G Model Bolsters Outlook
Out after last night’s close were solid results from AAPL where the 3Q19 introduction of the iPhone11 set up a solid year-end holiday gift-giving season performance. This growth was encouraging given that global smartphone sales in 2019 were down for the first time ever, a clear another indication of a mature product market. AAPL also showed improved performance in the China market where price repositioning on older products served to help gain market share. Surprisingly, AAPL Services revenues, while up over +10% year/year, were short of analyst expectations. AAPL ended 2019 with 480mm services customers, up +33% year/year, and looks to gain a further +25% to 600mm in 2020, a development that should serve to drive steady improvement in Services revenue for the year ahead.
The major positive driver for AAPL in 2020 and beyond will be the coming introduction of a 5G-capable smartphone. The roll-out of 5G wireless communications networks is expected to enable a step function increase in societal productivity. 5G connects everything from autonomous vehicles to industrial systems and medical devices at speeds sufficient to allow computing to happen in the cloud rather than on a device. Since population growth is slowing in the US/China and negative in Japan/parts of Europe, productivity growth will increasingly bear the burden of creating global economic growth in the coming years. That will come from fresh innovations enabled by 5G cellular systems.
Meanwhile, the spreading Wuhan coronavirus (Wuhan SARS) is expected to limit economic growth during 1H20 as travel restrictions limit both consumer and industrial activity. For AAPL, one can expect that 1Q20 results for China will be weak as product sales around the Lunar New Year holiday are dampened. In terms of product sourcing, AAPL has to some extent shifted its supply chain away from China as a result of the Trump Trade War, but not to the full extent where there may be product shortages globally over the course of 2020.
Coming Results Unlikely To Be Clouded By Wuhan SARS China Weakness
While it is early in the 4Q19 tech sector results reporting season, one thing investors should appreciate is that the drive by China to develop domestic tech sector champions through its China 2025 program and other measure restrictive to non-Chinese companies means that the impact of Wuhan SARS will likely be muted with regard to 2020 results. Social media companies FB (results out tonight) and TWTR along with GOOGL have at best a minimal presence in China. AMZN has exposure to China only to the extent that products sold through its e-commerce platform by either itself or third-party vendors are sourced from China. There may be possible stock-outs and/or price increases, but most likely alternate sources or substitute products will be found to meet customer requirements. To this end, these companies’ results are driven by the global economy ex-China.
The economic contagion from Wuhan SARS is for now limited. What investors do need to watch is the extent to which Wuhan SARS spreads to other countries. Here, the indications are concerning as there are now cases of Wuhan SARS in Japan, Taiwan, Vietnam and Germany involving patients who had not traveled to China, indicating that person-to-person transmission of Wuhan SARS has taken root outside of China. Note that major international air carrier British Airways has now suspended all flights into and out of China. We expect other carriers may soon adopt similar measures.