Apple’s Mac and iPad Sales Bolstered by Work-From-Home

Apple reported fiscal third-quarter results ahead of our expectations led by Mac and iPad segments. The firm did not provide guidance last quarter and once more refrained from offering guidance due to uncertainty regarding the coronavirus. CEO Tim Cook noted weak sales in April were offset by better-than-expected demand in May and June led by the cheaper iPhone SE launch, continued economic stimulus in many regions, and the lifting of some shelter-in-place restrictions around the world. Management confirmed that supply of the upcoming iPhones will be available in October rather than September. We are raising our fair value estimate for narrow-moat Apple to $285 per share from $240 as we incorporate a stronger near-term outlook for the Mac and iPad segments due to the ongoing work- and learning-from-home dynamics as well as increased expectations for the upcoming 5G iPhone. Nonetheless, given the 70% appreciation of shares from mid-March lows, we recommend prospective investors wait for a wider margin of safety given the precarious state of the global economy.

Third-quarter revenue was up 11% year over year thanks to growth in iPad (31%), Mac (22%), services (15%), and wearables, home, and accessories (17%). Management noted the iPad and Mac segments remained supply constrained, which bodes well for these business lines in the coming quarters. Apple generated $26.4 billion in iPhone revenue, which was up 2% year over year thanks to solid adoption of the latest SE model. Service revenue was $13.2 billion. Apple now has over 550 million paid subscribers, 130 million more than a year ago, and the firm expects 600 million subs by December 2020. Wearables growth remained stellar with sales up 17% year over year. In its three largest regions, Apple’s sales had strong results: up 8% in the Americas, up 19% in Europe, and up 2% in China. Gross margin of 38.4% was down 40 basis points sequentially due to a slightly weaker mix.

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