Company Overview: Apple Inc. designs, manufactures and markets mobile communication and media devices, personal computers and portable digital music players. The Company sells a range of related software, services, accessories, networking solutions, and third-party digital content and applications. The Company's segments include the Americas, Europe, Greater China, Japan and Rest of Asia Pacific. The Americas segment includes both North and South America. The Europe segment includes European countries, India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and the Asian countries not included in the Company's other operating segments. Its products and services include iPhone, iPad, Mac, iPod, Apple Watch, Apple TV, a portfolio of consumer and professional software applications, iPhone OS (iOS), OS X and watchOS operating systems, iCloud, Apple Pay and a range of accessory, service and support offerings.


AAPL Details

Footprint Expansion and job creation in the US: Apple Inc. (NASDAQ: AAPL) formerly Apple Computer, Inc., is into the designing, manufacturing and marketing of mobile communication and media devices, personal computers and portable digital music players. The company gets revenue by selling portfolio of products that are related to software, services, accessories, networking solutions, etc. The company also sells third-party digital content and applications; and its business is carried out by operating through segments that include the broad geographic locations like Americas, Europe, China, Japan and Asia Pacific. The Americas has operations in both North and South America. The Europe segment also operates in Middle East, India and Africa. Similarly, the China segment includes Taiwan and Hong Kong. The Asia Pacific segment has Australia and few Asian countries. AAPL is now investing $1 billion for the expansion of its operations in Austin, that comprises of building a new campus in North Austin. Expansion of operations is also planned for Seattle, Culver City, and San Diego. Further, the expansion in cities across the United States has also been planned, that includes Pittsburgh, New York and Boulder, Colorado over the duration of next three years. The potential remains for additional expansion elsewhere in the US over time. Meanwhile, in 2018, Apple had employed 6,000 people from America. The company currently recruits 90,000 people from all the 50 states of America. As announced previously, the company has planned to create 20,000 jobs in the US by 2023. Apple has already employed over 1,000 people in US. AAPL’s newest Austin campus is planned to employ 5,000 additional employees currently, and then it will be expanded as campus has the capacity to employ 15,000, and is projected to make Apple the largest private employer in Austin. AAPL will invest $10 billion in next five years and this will be made in US data centers. About $4.5 billion investment will be made in near term. Further, data centers will be built in North Carolina, Arizona and Nevada; and the company is building newest data center in Waukee.


Key Margin and Ratio Performance (Source: Company Reports and Thomson Reuters)

Apple Watch takes the next step in benefitting people with the release of heart monitoring features: The ECG app has commenced on Apple Watch Series 4, which is the first product meant to directly being provided to the consumer and has enabled the customers to take an electrocardiogram right from their wrist. The watch has been designed to monitor and capture the heart beat rhythm particularly, when the person will experience problems such as rapid beat or a skipped heartbeat. This will then be provided in the form of a sensitive data to physicians. The irregular rhythm notification feature on Apple Watch can check heart rhythms in the background occasionally and the information of an irregular heart rhythm, if appearing to be atrial fibrillation (AFib), can be identified. AAPL has been associated with the Food and Drug Administration (FDA) over the last few years for De Novo classification for the ECG app and the irregular heart rhythm notification, and has been successful in getting these features available. The ECG app’s ability to accurately record an ECG into AFib and sinus rhythm has been tested and validated on around 600 participants in a clinical trial. Therefore, Apple Watch has taken the next step to benefit people with the release of the heart monitoring features and can prevent future heart strokes.

Targeting a first official, company-owned retail store in India: In the year 2018, the number of iPhones shipped to India witnessed a significant slip (by 40%) when compared to year 2017. Now AAPL has planned to open its own retail store, which will be first in India. Such stores are important strategic part in the promotion of the brand around the world. However, as per the policy, India requires single-brand retailers that are more than 51% foreign-owned to buy at least 30% of their manufacturing materials from Indian vendor, which is a biggest hurdle that is difficult for the company to clear, as most smartphone components are manufactured elsewhere in Asia.

Services revenue reached an all-time high during the fourth quarter 2018: AAPL stock had risen after the company posted better than expected results for the fourth quarter of 2018, but gave weaker outlook for holiday season (December) quarter. The unit sales seem to have become extraneous as customers tend to get bundled products along with subscription services (for example Apple Music). Thus, Apple has indicated to provide data of the cost of sales when it comes to services business. However, the investors had reacted negatively to this plan. For FY18, AAPL’s revenue was of the order of US$265.6 billion and earnings of US$11.91 per share. This has been above analyst estimates of US$264 billion and US$11.79 per share, respectively. AAPL’s fourth quarter FY 18 also saw adjusted earnings per share of $2.91, which has beaten the average analysts’ estimates of about $2.78. The earnings per share grew 41 percent, which is a record. The adjusted revenue growth was 20 percent (to $62.9 billion) in the fourth quarter of FY 18, again above market estimate of $61.59 billion. International sales has formed 61 percent of the revenue for the fourth quarter; and the Services revenue of $10 billion, was record high. After making an adjustment of one-time of $640 million booked in the fourth quarter of FY17, the services revenue rose from $7.9 billion in 4Q FY17 to $10 billion in 4Q FY18. This was a growth of 27 percent. AAPL had sold a lower number of iPhones, as indicated earlier. The number as reported was 46.9 million of iPhones in the fourth quarter; however the average selling price of iPhones was US$793, which is above the analyst expectation of about US$750.78. Meanwhile, AAPL has been expanding the use of feature that involves the facial recognition unlocking system in iPhones and iPads. This has been developed with special lasers technology produced for few suppliers. Overall, in FY 18, the company has shipped the 2 billion iOS devices and has achieved the strongest revenue and earnings in Apple’s history.


Net Sales by Category (Source: Company Reports)

Capital Management: Apple had declared a cash dividend per share of 73 cents of the company’s common stock. The dividend was paid on November 15, 2018 with a record date of November 12, 2018. The company had returned over $23 billion to shareholders in the form of dividends and share repurchases during the September quarter; and eventually reported for the total capital returned to about $90 billion in FY18.

Outlook for FY 19: For the first quarter of 2019, the group expects revenue to be between $89 billion and $93 billion; while the midpoint of $91 billion is less than consensus estimates of $92.91 billion. However, this still projects a decent figure given the recent shortcomings. For the first quarter of 2019, the gross margin is expected to be between 38 percent and 38.5 percent. The operating expenses are expected to be between $8.7 billion and $8.8 billion and other income/(expense) is expected to be of $300 million and tax rate to be of approximately 16.5 percent before discrete items. Moreover, for FY 19, the revenues are expected to witness a growth of 4.5% to $277.67 billion and full-year earnings per share is expected to rise about 12%.


Return of Capital (Source: Company Reports)

Stock Recommendation: AAPL stock has fallen almost over 20% in three months after the decline of iPhone unit sales. The number of iPhones sold and shipped saw a downtrend. Apple's market share has also fallen from 2% to 1%. AAPL stock is trading at $160.89, and has support at $150 and resistance at $190. This means the investors have an opportunity to accumulate the stock as it is near the support level. The value is expected to come from the services business (led by Apple Music), which  underpinned the company to expand and challenge its competitors. AAPL is now expected to expand its growth area with the anticipated launch of a streaming TV service, scheduled for next year, to give competition to Netflix, Amazon, Disney, and AT&T. The group has maintained gross margins around 38% in the past 2 years and ROE is much ahead of the industry median of about 4%. The drivers related to Licensing, App Store, and AppleCare, and overall services business might slow down a bit but have the potential to keep the business going with some support coming in from Music, iCloud, and Apple Pay. The growth rates might decelerate but the current price with overall business positioning is portraying a decent opportunity for next 24 months. We expect a single digit rise in stock price in the next 12-24 months and have a “Buy” recommendation on the stock at the current price of $ 160.89.
 

AAPL Daily Chart (Source: Thomson Reuters)

 
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