Chris Hill: I think we have to talk about Apple.
Shares of Apple falling 10% on Thursday after CEO Tim Cook warned investors first quarter
revenue was going to be about $5-$8 billion lower than previously expected.
Several reasons for that, Matty.
The trade war in China, the economic slowdown in China, the battery replacement program
that they had last fall. This was still pretty shocking development.
Matt Argersinger: Lots of moving parts, but you're right. This was pretty bad.
If you look back to their guidance in early November, looking for between $89-$93 billion in revenue.
To come in, then, at $84 billion, $5 billion below the low end of your guided range, that's a problem.
CEO Tim Cook said that really 100% of the miss was due to China and a contraction in
the smartphone market there. That's a good excuse. It's probably the right excuse.
Investors have been questioning whether or not the iPhone, especially the latest versions
of the iPhones with the high price tags, could really penetrate the highly competitive
smartphone market in China.
I think we're starting to see the fact that no, that's not really the case.
Aaron Bush: I don't think it's that surprising, actually, that Apple has China issues.
I was just thinking back, four years ago, when Matt and I were talking about China in
the context of our Supernova portfolio, talking about opportunities and concerns,
China was a big thing we were talking about.
At the time, we realized that China is a big opportunity simply because how many people
are in that country, but we didn't necessarily expect it to play out the same way as it did in the U.S.
Since then, the stock is about roughly flat with the market, which is interesting.
I think we started to see the cracks in the foundation about two years ago.
About that time is when I started studying Tencent, which owns WeChat.
It made me realize that iOS is far less important in China because WeChat is an in-app operating
system that people do everything in.
So, the same type of competitive advantage that Apple would have in the U.S. with iMessage,
Notes, various services, that doesn't exist in China.
It showed in the data.
At the time, the retention rate, people who would have an iPhone that would buy another
iPhone, outside of China it was over 80%. In China, it was 50%, which is essentially a coin flip.
I think now, because of the economic turbulence that's starting to happen, trade wars, slowdown,
we're starting to see that play out at an accelerated rate.
People who would be the Apple buyers either already own them or did own them.
Upgrade cycles are longer, and retention is still sub-optimal.
Apple just has mediocre market share, and I think that's not necessarily going to change.
Argersinger: I agree.
As long as the iPhone is such a large part of Apple's core business, they can talk about
Services all they want, but this is still a product that's about 70% of revenue and
the majority of operating profits. Now, I will say this, because we're positive people here at The Fool.
Coming into this report, Apple was already down about 40% from its high.
Granted, it had a horrible day this week that took it down even further.
But even at the reduced earnings estimates now, you're looking at a stock that's only
trading about 11X-12X earnings. Certainly below the average market multiple.
Now, if earnings come down further, the stock could certainly follow suit.
But it's hard not to call it cheap right now.
Hill: That’s the thing.
Tim Cook talked about how he hadn't seen the December numbers, therefore there's no way
he's seen the January numbers, because they're not in yet.
Their first quarter report comes out in early February.
If you're looking at this stock, and you're thinking, "Boy, it looks cheap," do you buy here?
Or you want to see what the actual numbers are before you put down a little money to
buy some stock? Bush: Oh, I don't know.
It sounds like another coin flip to me. We don't really know.
I do think that the valuation is somewhat compelling.
You're betting that iPhone sales stabilize, and you're betting that the Services segment
can become much more than 15% of revenue, which it is now.
I think that most people think that is the case. Or, at least around here, that's the bullish stance.
Personally, I have some more questions.
When you have a monopoly taking 30% of every single transaction that goes on your ecosystem,
regulatory issues will one day be a concern.
The same thing that we've seen with Alphabet, the same thing we see with Facebook.
One day, those same headlines are going to be going on with Apple, too.
And then the Services narrative will slowly not seem so amazing anymore.