Thursday, Nov 1st 2018

Light Holiday Forecast Weighs on Apple


Today's light forecast for the holiday quarter, combined with the macro concerns, is likely driving the stock after hours.

Apple posted a solid quarter with sales and earnings above Wall Street's estimates. Despite the record annual profit and revenue, Apple shares fell in after-hours trading.

The reason: all eyes focused on the company's (light) forecast for the all-important holiday quarter.

The company gave an outlook for the December quarter that was a bit below analyst estimates, despite the launch of iPhone XR sales in early October. Historically, the holiday quarter is Apple's largest in terms of sales and profit.

The light forecast in such a critical period is causing concern amongst short-term traders trying to make a quick buck on Apple stock heading into the holidays. The forecast comes amidst uncertainty over how Apple will handle macroeconomic issues in China and how those might affect consumer willingness to upgrade their devices.

Apple launched large-screen and dual-Sim smartphones this year, which were (and still are) expected to play well in the Chinese market. However, Apple must contend with trade-war tensions and new rules around game launches. Both could affect its revenue opportunities in China.

In a nutshell: today's light forecast for the holiday quarter, combined with the macro concerns, is likely driving the stock after hours. Apple's CFO also said the company will stop giving unit sales data on iPhones, iPads, and Macs in the near future. Investors who trade based on this data are hence also concerned.

Taking a step back, we don't believe Apple's intrinsic value just declined by $50-100B (which is implied by the stock's ~5-10% after-hours decline). The holiday quarter is important, but we think the guidance is conservative.

The long-term thesis on Apple is about its sticky software & services ecosystem surrounding its flagship iPhone user base. That's a wide moat enabling Apple to maintain pricing power and therefore sales and earnings growth, even though it may "miss" a quarter here and there.

We remain positive on the long-term prospects for Apple.

As of this writing, AAPL was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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