Financial Snapshot: AAPL ($121.43)
-FY15Q3 Rev/EPS actual – Revs $49.6bn (+33% y/y), EPS $1.85 (+44% y/y)
-Valuation: P/E 13.4x FY15 EPS (0.58x PEG ratio), AAPL shares attractive as still early in major product cycles with iPhone6 and Apple Watch.
AAPL – iPhone6 Shipments Fall Short Of Expectations, But Still Only 27% Of Installed Base Has Traded Up:
While AAPL posted better than expected FY15Q3 financial performance (Street: revs $49.4bn, EPS $1.81), the underlying shipments of 47.5mm iPhones were short of hoped for performance of 48-50mm. The shortfall coupled with AAPL following its normal practice of providing below Street consensus forward quarter guidance led to AAPL shares selling off 8% after hours. Meanwhile, important to note that revenue impact of the strong US$ limited revenue growth by 8% (i.e. year/year revenue growth on a constant currency basis would be +41%, better than the +33% reported). Various concerns arise relative to the iPhone shipment performance (e.g. weakness in China (revenues at $13.23bn were down -21% quarter/quarter as Lunar New Year holiday season bolstered iPhone sales), fears of consumers waiting for expected iPhone6S coming in 2H15), but it is important to note that as only 27% of the installed base of iPhone users has upgraded to the iPhone6 the product cycle has more room to run. In broader terms, the iPhone6 upgrade cycle may be expected to boost the current iPhone installed user base of 404mm to 650mm by 2018, a penetration that will represent only 33% of an estimated 1.82bn premium smartphone subscribers. Meanwhile, the popularity of the higher margin iPhone6+ is expected to drive gross margin expansion.
AAPL – Apple Watch Estimated 2mm Units Also Short of Expectations, But Still Acceptable:
While AAPL not disclosing Apple Watch sales by consolidating it along with other product categories in Other Revenue, the $900mm quarter/quarter increase offered some sense as to the launch impact. Best estimates are that Apple Watch sales were approximately 2mm, a level short of Street expectations of 4.5-5mm units. While the Street may have gotten ahead of itself, the fact remains Apple Watch sales at this point in its launch is outperforming that of both iPhone and iPad. Not bad for a wearable technology device.
AAPL – iPhone6 Upgrade Cycle & Apple Watch Launch Should Sustain Growth Rate & Bolster Valuation:
With AAPL presently enjoying positive product cycle dynamics across its portfolio, investors should be encouraged that management’s ability to build the company beyond the iPhone offering is be affirmed. As investors discount the emergence of a more balanced growth company, valuation can expand from the current price-to-earnings-growth (PEG) multiple of 0.58x to 0.85x, which would result in a share price of $180, a 48% gain from current levels.
Financial Snapshot: MSFT ($45.50)
– FY15Q4 Rev/EPS actual – Revs $22.2bn (-5% y/y), EPS $0.62 (+13% y/y)
-Valuation: P/E 18.8x FY15 EPS (5.0x PEG ratio), MSFT shares are clearly pricing in benefit from restructuring and positioning towards cloud computing.
MSFT – FY15Q4 Provided Major Charges With $7.6bn Nokia Writeoff, But “Cloud” Growth Remains Strong:
MSFT posted above consensus operating results (Street: revs $22.1bn, EPS $0.58) with commercial “cloud” revenues +88% year/year (+96% y/y on a constant currency basis) at an $8bn annual run-rate. MSFT experienced the last of its difficult y/y revenue comparisons from the phase-out of WindowsXP bolstering commercial upgrades to Windows7. The weakness in PC OEM channel remains a concern as traditional Office productivity suite sales were down -13% y/y. Guidance disappointed investors as forward quarter revenue was indicated at $21bn versus $22.6bn consensus (-7% shortfall and a -9% y/y decline), a result in part reflecting a change in accounting method to defer Windows10 revenues.
MSFT – Company Has Resources To Make Succesful Transition, Continue To Own:
While MSFT share valuation is elevated relative to its EPS growth rate, we expect as the restructuring steps take hold that EPS will rise considerably, especially as MSFT continues to shrink its share base while accelerating revenue growth by concentrating its efforts on high-growth “cloud” computing initiatives. We have a $54 price target, a +19% gain from current levels.