2 Numbers In Apple’s Q4 Report Can Save Its $1 Trillion Valuation

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  • Reports Thursday, November 1, after the market closes
  • Revenue Expectation: $61.43 B
  • EPS: $2.78

Apple (NASDAQ:AAPL), the world’s most valuable company, is reporting its fourth quarter 2018 earnings today, and there’s no doubt that the world is watching.

For Apple investors, as well as its stock, there are two things that matter most these days: Improving sales through higher prices and diversifying its revenue base away from iPhones. In the short-run, the company is having remarkable success on both these fronts.

1. Improving Sales Through Higher Prices

A year after increasing its flagship iPhone price to $999, in the last quarter, Apple has reported higher growth in sales. While iPhone volumes didn’t rise much, strong iPhone X demand helped increase the iconic smartphone’s average selling price (ASP) by $118, taking it up to $724, propelled total iPhone revenue growth higher by 20%.

This week’s launch of new computer models such as Mac personal computers and redesigned iPads, point to a similar strategy. The company is raising prices substantially on these new versions, betting on the loyalty of its costumers, making them willing to pay more for Apple products. The price of the MacBook Air was raised by 20%, the Mac mini by 60%, and the iPad Pro by about 25%.

2. Diversifying Its Revenue Base Away From iPhones

The other part of Apple’s strategy to grow sales amid slowing smartphone volume is to reduce its reliance on the iPhone. By increasing the revenue share from its services and “other products” segments, the company believes it can still grow at the robust pace investors have come to expect.

Indeed, so far, this divergence is deepening. Both Apple’s services and “other product” segments have grown in the last quarter, up 30%. While those businesses may eventually offset the slowing growth of the iPhone, we believe that Apple still has the power to fetch higher prices for its flagship devices without diminishing demand in a significant way.

2 Numbers In Apple’s Q4 Report Can Save Its $1 Trillion Valuation

Daily Apple Chart: March 2018-Present

That’s the main reason that Apple shares have performed much better in the current tech sell-off, outperforming other tech giants. At the time of writing, its stock, which closed yesterday at $218.86 was down just 6% from the $233.47 peak it hit in early October.

On average, analysts polled by FactSet expect Apple to post revenue for the past quaerter of $61.43 billion, up 17% from the same period a year ago, and GAAP EPS of $2.78, for the same year-ago period, a gain of 34%.

Bottom Line

Despite some deterioration in the macro environment this year, we don’t see any threat to Apple’s $1 trillion valuation, nor to its growth momentum. In fact, the company’s stock is the net beneficiary of funds flow from social media stocks to the hardware giants.

Companies such as Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL) are under pressure because of data privacy issues. Apple, which is immune from this scrutiny, is well-positioned to attract those outflows based on the strength of its business and the attraction of its massive capital return program, in the shape of dividends and share buybacks.

Despite all the current market noise, buying and holding Apple shares remains a winning strategy.

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