Has Apple Still Got It?

Apple (AAPL) announced second quarter ended March 26, 2016 net sales of $50.6 billion, down 13 percent year-over-year from $58.0 billion during the same period last year. Going forward, the company estimates fiscal third quarter of 2016 total revenue in the range of $41 billion to $43 billion.

A closer look

Apple declared second quarter of 2016 net income of $10.5 billion, or $1.90 per diluted share, down 23 percent year-over-year from $13.6 billion, or $2.33 per diluted share in second quarter of 2015.
Moving ahead, the company estimates third quarter of fiscal year 2016 gross margin to be in the range of 37.5 percent to 38 percent.

The key technology company reported continued year-over-year decline in both its top and bottom lines primarily due to the weaker Apple product sales witnessed all through the quarter despite, continued innovation delivered by the company.

The weaker iPhone upgrades for the quarter has resulted in 16% fall in total product shipments with only fewer people upgrading to the newest iPhones. This has particularly put downward pressure on Apple’s top line growth as depicted in the chart below.

The quarter-over-quarter segment revenues for Apple from 2012 till 2016 for each of the key growth segments including, iPhone, iPad, Mac, Services and other products have recently illustrated growth uncertainty with Mac sales estimated to reach 5.66 million units, an increase from 5.52 million units traded last year as per the IDC findings.

According to the latest findings of FBR Capital Markets, the tablet line of Apple is projected to decline despite the planned introduction of the new 12.9-inch iPad Pro during November. During this year and till date, a total of approximately 18 million units were sold as against 21.4 million units sold last year.

The uncertain sales figure of Apple clearly depicts unplanned innovation and product launches being made by the company during this year which has resulted in somewhat weaker customer traction for the company’s key products and services.

A huge market

China is considered to be the second largest market for Apple after the US in sales. However, Apple’s total revenue in Greater China including, Taiwan and Hong Kong declined by nearly 26% with iPhone sales recently having declined from 61.2 million units last year to 51.2 million units till date.

Going forward, Apple targets on growing inorganically through strategic acquisitions of other key related technology companies to accelerate superior and unique product development while entering into newer product segments. Importantly, Apple has concluded 15 small and strategic acquisitions since last one year.

The key technology company needs to develop unique growth strategies to accelerate organic growth through advanced product and services development that are priced competitively to avoid Apple’s market share being cannibalized to several other telecom players in the field.

During March quarter, Apple delivered robust cash flow from operations of approximately $11.6 billion and paid back $10 billion to the key stakeholders in the form of dividends and planned share repurchases in the quarter. Moving ahead, Apple has further enhanced its share repurchase program to about $250 billion and plans to execute the program till March 2018 ending.

The Board of Directors at Apple, Inc. recently approved a 10 percent quarterly dividend growth and offered $0.57 per share of dividends to be paid on May 12, 2016 to all the key stakeholders as of the business closure on May 9, 2016.

Therefore, Apple seems focused on returning a majority of the invested capital to the shareholders in the form of dividends and through strategic share repurchases which makes the stock an attractive investment option for new shareholders.

Conclusion

Overall, the investors are advised to “Hold” their position in Apple Inc. considering the company’s significant long-term growth prospects but a currently weaker financial position with a notable total debt of $79.91 billion against weaker total cash position of $55.84 billion only, restricting the company to make future growth investments. The PEG ratio of 1.24 depicts satisfactory company growth and somewhat better than the industry’s growth average of 1.05. The profit margin of 22.27% seems impressive.
Published on May 20, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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