Apple Poised to Return to Growth in Fiscal 2020

Apple AAPL reported fiscal fourth-quarter results that continued the recent trend of strong services and wearables sales overshadowing continued weakness in iPhone sales. While iPhone revenue fell 15% across the first three quarters of fiscal 2019, fourth-quarter iPhone sales fell only 9% year over year, thanks to early traction of the iPhone 11 and stabilization in key geographies such as Greater China. Outside of iPhone, fourth-quarter sales grew 17% year over year. Based on forward guidance, it appears the iPhone 11 launch has been stronger than we had anticipated. We now expect a relatively healthy growth year for the iPhone business, while the 5G iPhone likely to be launched in 2020 should help sustain solid growth. We are raising our fair value estimate for narrow-moat Apple to $220 per share from $200. With shares up 54% year-to-date, we recommend prospective investors seek a wider margin of safety.

Fourth-quarter revenue rose 2% year over year to $64 billion. Revenue from the iPhone for the quarter was $33.4 billion, and we expect the price cut to $699 from $749 for the base LCD model (iPhone 11) versus last year’s XR model will support greater elasticity for iPhone demand in the coming quarter. Services sales for the quarter were $12.5 billion, up 18% year over year thanks to all-time records for the App Store, Apple Care, Music, cloud services, payment services, and App Store search ad business. Wearables grew well over 50% year over year, as the latest Apple Watch and AirPods continue to have success. Gross margins were 38%, up 40 basis points sequentially due to leverage from higher sales. For fiscal 2019, revenue fell 2% to $260.1 billion, as weak iPhone sales offset growth in every other category. We expect the firm to return to growth in fiscal 2020, and we estimate a 5-year revenue CAGR of 5% through fiscal 2024. First-quarter sales are expected to be in the range of $85.5 billion and $89.5 billion, with the midpoint implying 4% year-over-year growth.

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