AAPL Hits All-Time High, AAPL Valuation Metrics, Observations on Big Tech Valuation
We begin today’s update with my thoughts on AAPL shares hitting all-time highs. The discussion will then turn to an examination of AAPL valuation metrics (forward P/E, EV/FCF, and free cash flow yield). In addition to looking at Apple’s valuation metrics, there is value found in taking a broader look at how Big Tech is trading from a valuation perspective. We will keep our focus to free cash flow / enterprise value. While there may not be one gold standard valuation metric that all market participants prioritize, free cash flow remains my go-to metric. The data removes much of the noise that is found with income statement line items.
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Apple Share Buyback Hits Record High, A “Shrinking” Apple
Hello everyone. Today’s update will have a share buyback theme. While we received a few new buyback data points in Apple’s 2024 10-K, the discussion won’t be focused on just 4Q24 trends.
Let’s jump right in.
Apple Share Buyback Hits Record High
Here is quarterly data from the past three years for Apple's share buyback via open market transactions:
4Q21: $20.0B. Average repurchase price per share: $146.41.
1Q22: $14.4B. Average repurchase price per share: $153.76.
2Q22: $22.9B. Average repurchase price per share: $167.16.
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Apple 4Q24 Earnings Review: A Few Apple Services Surprises
Hello everyone.
For today’s update, we will address another Apple question that has generated buzz within financial circles: How is Apple’s financial performance being impacted by Services? There are a few surprises to uncover.
Let’s jump right in.
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Wall Street Warms up to Apple, AAPL Valuation Update
Hello everyone.
Over at Above Avalon’s sibling site, Inside Orchard, my essay last week, "Big Tech Is Winning Over Wall Street," went over a Wall Street observation that has been on my mind for the past few weeks.
While NVIDIA was capturing many hearts and minds on Wall Street, a larger story was quietly unfolding in the background. Wall Street was turning decidedly more bullish on the broader Big Tech bucket (Microsoft, Apple, Alphabet, Amazon, Meta). The change in tone isn’t just attributable to AI either. That may come across as a shocking stance to hold - the Inside Orchard essay goes into more of my thinking.
For today, we will keep our focus specifically to how Wall Street is warming up to Apple. The discussion then turns to an examination of AAPL valuation metrics (forward P/E, EV/FCF, and free cash flow yield).
Wall Street Warms up to Apple
A few weeks back, we talked about the trading action seen in Apple shares following WWDC. The signs pointed to algorithm-driven program trading leading to a sudden move higher. It’s certainly possible that some market participants were swayed by other things like fundamentals, but the heavy trading volume suggests something more systematic. Another possibility that we did not explore was a pair trade involving
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AAPL and Wacky Behavior
I would use extreme caution interpreting what's going on with Wall Street as it pertains to Apple shares. Attributing any single day move to a particular news catalyst is a futile exercise.
On June 11th, Apple shares closed up 7.2%. That is the one of the strongest daily moves higher in recent years (there were a few 10%+ moves in 2019 to 2021). For a $3T market cap company, it's noteworthy. One would assume the move higher was related to WWDC. Every Wall Street bank published their WWDC reaction article the night prior. However, there are a few things that give me pause about that thinking.
Apple shares did not gap significantly higher between Monday's close (June 10th) and Tuesday's open (June 11th). In fact, there was no gap at all. This suggests there was not a sudden event or realization the prior night or morning that led to a dramatic shift in demand/supply of issues. Shares were trading as high as $197 on the 10th. Shares opened somewhat calmly at $193 on the 11th. The next two hours saw significant volume and a big move higher. Even more strange? There was another huge move higher at the end of the day into the close.
How is that possible? What happened?
One answer: algorithm-driven / programming trading. On June 11th, demand and supply of AAPL shares was not necessarily driven by participants buying or selling because of WWDC or Apple Intelligence. Instead, computers took over as AAPL shares began to flash (positive) trading signals. To have shares (of the largest company mind you) move a few percentage points higher in an hour triggers bells on trading desks. Have it move 5% higher? More bells. 7%? Even more bells. The fact that these moves weren't overnight gaps factored into the programs. To then have all-time price highs be involved and technical resistance levels be broken, yep - more bells. We can debate technical analysis, but it's a fact programs take such variables into account.
As evidence that something funky happened with wide market participation, AAPL trading volume ended up being 4x average on June 11th. One possible explanation for the heavy volume: The buyside has been underweight AAPL shares all year. Given Apple's large weight in the S&P 500, if the company is underweight in a fund's portfolio and then shares moves significantly higher in price, those funds will see a bad day. As a result, they would need to buy AAPL shares to increase their exposure.
Of course, the market is large and there could be other factors at play. Do some analysts think Apple will sell more iPhones because of Apple Intelligence? Sure. Do some analysts think Apple will generate more Services revenue? Sure. Could those factors have impacted AAPL last week? Sure. This is why one can never be 100% confident that the same event is responsible for a daily tock price move. However, given the way AAPL shares traded last week, I suspect there was a lot more going on behind the scenes of a technical nature than just people being more bullish about iPhone sales or Apple Intelligence.
I do not think Wall Street comprehends long-term implications related to Apple any better today than pre-WWDC. It took Wall Street years to comprehend iPhone. Will likely see the same thing with Apple Vision Pro and spatial computing. Apple Intelligence? Will take years for Wall Street to fully digest.
How Apple Intelligence Was Developed, Ranking Apple Intelligence Features, AAPL’s Wacky Price Action
There is value found in spending time on the details regarding how Apple Intelligence was developed and functions. We will then go over my thoughts on the various Apple Intelligence features, ranking the features from most impressive to most concerning. We will then address AAPL price action.
Happy Thursday. It’s been a very busy week. As a reminder, we still have some WWDC news to go over early next week.
There’s a lot to cover today, so let’s jump right in.
How Apple Intelligence Was Developed
During Apple’s Platforms State of the Union presentation (available to view here), which is aimed at developers, the company went into detail regarding how Apple Intelligence was developed.
Apple Intelligence began with an on-device large language model that Apple built to achieve a certain power/size balance that allowed it run on device yet power the experiences Apple wanted to offer. Apple relied on fine-tuning to “teach” the model certain tasks such as text summarization, proofreading etc. Instead of producing different models with different expertise objectives, Apple relied on adapters which basically gave the foundation model specialization capabilities.
Apple then compressed the model (16-bit per parameter down to 4-bit) with on-device being the goal.
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My 2Q24 Apple Estimates, Expectations for Apple's 3Q24 Guidance, My Updated Apple Earnings Model
Happy Wednesday. One quick thing before we get to the second half of my earnings preview.
Financial Models Add-on. As a reminder, members now have access to my iPhone, iPad, and Apple Watch installed base models with the Financial Models add-on. These models make it possible to estimate device unit sales, the number of devices in the wild over time, product upgrade cycle length, percent of device sales going to new users versus existing users by year and more. For those of you who purchased the Financial Models add-on, all installed base models have been updated ahead of earnings. You can access the models at any time by logging into your Above Avalon membership account here and going to the Digital Package tab (shown below). My earnings model has also been uploaded so that it will always be available in the same tab for easy access.
The Financial Models add-on is designed to be a perfect companion for AAPL investors wanting to take a deep dive into Apple’s financials as well as Apple competitors and suppliers needing to better understand the marketplace dynamic. For pricing information and to purchase the add-on, check out this page.
My 2Q24 Apple Estimates
Here are my granular estimates for Apple’s 2Q24:
Revenue: $91.9B (consensus: $90.0B)
Overall gross margin: 46.9% (guidance: 46% to 47%)
Gross margin (HW): 37.4%
Gross margin (Services): 74.6%
EPS: $1.59 (consensus: $1.50)
iPhone revenue:
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Reading Between the Lines of Apple’s 1Q24 Earnings Q&A With Analysts
In today’s update, we will focus on Apple’s 1Q24 earnings Q&A session with analysts.
After recapping each question-and-answer exchange that occurred on the call between Apple and sell-side analysts, we will go over Neil’s response to the exchange. Let’s go beyond what was talked about on the call with the ninth installment of reading between the lines of Apple's earnings Q&A with analysts.
NOTE: The following earnings call questions (“Q (Sell-Side Firm)”) and answers (“Cook” or “Luca”) have been cut, summarized, paraphrased, and rearranged for clarity. To read the full question and answer exchanges, Seeking Alpha offers a written transcript here.
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My 1Q24 Apple Estimates, Expectations for 2Q24 Guidance, My Updated Apple Earnings Model
Apple reports FY1Q24 earnings on Thursday. Today’s update contains the second half of Neil’s earnings preview. The first half is available here. The update begins with Neil’s granular financial estimates. The discussion includes qualitative explanations for estimates related to Apple’s product categories. We then look at Neil’s expectations for what Apple will say about guidance (FY2Q24). We conclude with Neil’s updated Apple earnings model and how the model has changed over the past three months. Access to Neil’s Apple earnings model is a benefit associated with Above Avalon membership at no additional cost.
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Google Faked Its Gemini AI Demo, CNBC Pumped Alphabet Stock Due to Gemini Demo, Generative AI Demos Are Lacking
We kick off the update with Neil’s thoughts on Google’s Gemini demo and the discovery of the demo being faked. The discussion then looks at how the Gemini demo led to craziness, including CNBC pumping Alphabet shares solely because of a six-minute video. We conclude with why Neil thinks generative AI demos have been lacking to date.
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Payment is hosted by MoonClerk and secured by Stripe. Apple Pay and other mobile payment options are accepted. After signup, use this link to update your payment information and membership status at any time.
An audio version of this update is available to members who have the podcast add-on attached to their membership. More information about the podcast add-on is found here. Special Inside Orchard bundle pricing is available for Above Avalon members. Additional membership customization is available via the Financial Models add-on.
AAPL Closes Above $3 Trillion for Second Time, Apple’s Recent Stock Price Strength, Apple Valuation Update
Today's update begins with Neil’s thoughts on Apple closing above a $3 trillion market capitalization for the second time. We then look at Apple’s recent stock price strength and what may be behind the move higher. The update concludes with an examination of AAPL valuation metrics (forward P/E, EV/FCF, and free cash flow yield).
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Payment is hosted by MoonClerk and secured by Stripe. Apple Pay and other mobile payment options are accepted. After signup, use this link to update your payment information and membership status at any time.
An audio version of this update is available to members who have the podcast add-on attached to their membership. More information about the podcast add-on is found here. Special Inside Orchard bundle pricing is available for Above Avalon members. Additional membership customization is available via the Financial Models add-on.
Three Interesting Charts for Apple's 4Q23
Hello everyone. Welcome to Monday and a new week. We will continue our Apple 4Q23 earnings review.
Like last quarter, we will focus on three charts that go a long way in summarizing Apple’s current financial trends. We will cover the granular takeaways from Apple's 4Q23 earnings call in tomorrow’s update.
As a reminder, if you have questions about Apple’s earnings, please send them way. The questions can be covered as we proceed through the earnings review.
Three Interesting Charts for Apple's 4Q23
1) HW vs. Services Gross Profit Growth
Over the years, we have had various opportunities to compare key financial differences between Apple HW and Apple Services.
The former is heavily influenced by upgrading trends. For Apple to report HW revenue growth, the company needs to replace all of the revenue from the prior period just to be in a position to then grow. For products like iPhone, upgrading is responsible for approximately 75% of revenue. The percentage is lower – closer to 50% - for Mac and iPad.
During the pandemic, Apple device upgrading was strong as work from home and online/distance learning drove interest in new(er) devices. This benefit extended to companies paying for their employees to have the latest computing devices (at home).
Over the past 12 to 18 months, device upgrading has slowed across the industry.
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Setting the Stage for Apple’s FY4Q23 Earnings
Welcome to a new week. For today's update, we will kick off my Apple earnings preview with an overview of the setup heading into Thursday’s release. The plan is to continue the earnings preview on Wednesday.
As a reminder, Apple's "Scary Fast" online product event will take place tonight at 8 pm ET. We will talk about the announcements tomorrow.
Setting the Stage for Apple’s FY4Q23 Earnings
The setup heading into Apple earnings on Thursday is trending a tad positive. FY4Q results are notorious for being noisy quarters as supply issues cloud underlying demand for iPhone and Apple Watch. This was especially true this year as iPhone 15 Pro and Phone 15 Pro Max were in short supply at the end of September. The iPad and Mac will also likely fuel some ugly headlines with tough year-over-year compares. However, my expectation includes enough variables moving in the right direction to get Apple over its 4Q23 earnings expectations bar.
Margins remain impressive. Management guided close to a 11-year quarterly high for gross margin percentage.
Services revenue is trending stronger. Apple has been seeing growth in advertising, cloud services, and the App Store. The impact from price increases in 2022 for Music and TV+ will also help results. When considering Apple’s entire business, Services (and probably Apple Watch) come across as having the most impressive momentum.
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Apple's 3Q23 in Three Charts
Hello everyone. Welcome to Monday and a new week. We will continue our Apple 3Q23 review.
Given how the past few quarters for Apple have contained similar themes, we are going to try something different for this quarter's review. We will focus on three charts that sum up Apple's 3Q23. As we will see, there is quite a bit of consistency on display with each chart. (We will cover all of the granular takeaways from Apple's 3Q23 earnings call in tomorrow’s update.)
Before jumping into today’s update, one clarification regarding Friday’s update. When talking about Apple’s hardware margins, the commentary was garbled. That part of the update should have read:
Products (HW) gross margin: 35.4% (vs. my 35.7%). My iPhone gross margin estimate was a tad bit too optimistic. On a year-over-year basis, HW gross margins were up by 85 basis points.
Apple's 3Q23 in Three Charts
Gross Profit Resiliency
3Q23 results: $36B gross profit (up 1.5% from 3Q22)
There has been much attention placed on Apple’s gross margins (and rightly so). Gross margin is cost of goods subtracted from revenue. Based on management commentary, the company will come close to reporting a 11-year quarterly high for gross margin percentage 1Q24. Management provided a 44.0% to 45.0% range. Gross margin percentages don’t tell the full story though. Instead, we need to look at gross profit in absolute terms to obtain a cleaner assessment of Apple’s business.
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Apple’s Paid Subscriptions Growth Reaccelerates, The Case for Higher Apple Gross Margins
Hello everyone.
We will conclude our Apple earnings review by looking at Apple’s paid subscriptions growth and gross margins. There are a few follow-ups that we have not covered yet. The discussion includes Neil’s thoughts on why Apple’s gross margins still have room to move higher.
Let’s jump right in.
Apple’s Paid Subscriptions Growth Reaccelerates
In keeping with its usual disclosure, Apple provided updated comments regarding the number of paid subscriptions across the Apple ecosystem.
Based on Apple’s commentary, here are my estimates for the number of paid subscriptions across Apple’s ecosystem (first party and third party) on a quarterly basis:
1Q20: 482M paid subscriptions
2Q20: 518M
3Q20: 553M
4Q20: 588M
1Q21: 623M
2Q21: 663M
3Q21: 705M
4Q21: 749M
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Reading Between the Lines of Apple’s 1Q23 Earnings Q&A With Analysts (Daily Update)
Hello everyone. Welcome to a new week.
Last Friday, we went over the numbers from Apple’s 1Q23 earnings release. We also looked at two of the major themes from earnings: the significant FX impact on Apple’s results and changing device upgrading trends.
In today’s update, we will focus on Apple’s 1Q23 earnings Q&A session with analysts. Instead of just recapping the question and answer exchanges that occurred on Apple’s call, we will go over Neil’s thoughts / response to each exchange. This will allow Neil to go beyond what was talked about on the call. Let’s jump right in.
Reading Between the Lines of Apple’s 1Q23 Earnings Q&A With Analysts
NOTE: The following earnings call questions (“Q”) and answers (“Cook” or “Luca”) have been cut, summarized, paraphrased, and rearranged for clarity. To read the full question and answer exchanges, The Motley Fool offers a written transcript here.
Supply Chain
Q: What is the state of Apple’s supply chain? Do you expect to increase inventory levels to insulate from supply disruptions?
Cook: Production is now back to “what we need it to be.” We continue to optimize our supply chain. We now have final assembly for iPhone in three countries. Given all that has happened over the past three years, our supply chain has proven to be resilient.
My response: Apple received a variation
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My Apple 1Q23 Estimates, Expectations by Apple Product Category, Updated Apple Earnings Model (Daily Update)
Hello everyone. Apple reports FY1Q23 earnings (results from October to December) on Thursday. Today’s update contains the second half of Neil’s earnings preview. The first half is available here. The update begins with Neil’s granular financial estimates. The discussion then turns to qualitative explanations for each of Apple’s product categories. We conclude with Neil’s updated Apple earnings model and how the model has changed over the past three months. Access to Neil’s Apple earnings model is a benefit associated with Above Avalon membership at no additional cost.
Let’s jump into today’s update.
My Apple 1Q23 Estimates
Here are my granular estimates for Apple’s 1Q23:
Revenue: $123.0B (consensus: $121.2B)
Overall gross margin: 42.8% (guidance: 42.5% to 43.5%)
Gross margin (HW): 37.0%
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Setting the Stage for Apple 1Q23 Earnings, About AAPL’s Move Higher, Looking Ahead at Apple’s 2Q23 (Daily Update)
Hello everyone. Welcome to a new week.
Apple reports FY1Q23 earnings (results from October to December) on Thursday. We kick off today’s update with Neil’s thoughts and expectations heading into Apple’s earnings. The discussion goes over implications found with AAPL’s recent outperformance to the market. The update concludes with some of Neil’s early thoughts regarding how Apple’s 2Q23 (January to March) is trending.
We will go over Neil’s granular Apple financial estimates tomorrow. His revised Apple earnings model will also be ready.
Let’s jump into today’s update.
Setting the Stage for Apple 1Q23 Earnings
Heading into Apple’s earnings release on Thursday, expectations for what Apple will announce remain muted. Even though Apple shares are up 10% so far in 2023, the move doesn’t necessarily correspond with consensus believing Apple’s results and guidance will surprise to the upside. More on that shortly.
Low or muted expectations for Apple’s results may come as somewhat of a surprise. The company’s 4Q22 results were decent. Here was a very quick summary:
“Despite facing major FX headwinds, Apple’s ecosystem remained on track in 4Q22. The company reported all-around solid 4Q22 results. The few areas of weakness (iPad and Services came in below my expectations) were offset by iPhone, Mac, and Apple Watch sales strength.”
While 1Q23 guidance was a tad weak with revenue growth coming in about 200 basis points lower versus my (adjusted) expectations – check out our 4Q22 earnings review here for the details as to how that number was derived - Tim Cook and CFO Luca Maestri sounded
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Apple’s Transportation Ambition, Tesla 4Q22 Deliveries, Tesla’s Problem (Daily Update)
We begin with some words on Project Titan. Two weeks ago, the newest Above Avalon Report, “Project Titan: Apple’s Transportation Ambition,” was published. The discussion then turns to Tesla. The company reported 4Q22 delivery data. We go over the numbers and what Neil views as a problem for Tesla.
Hello everyone. Welcome to 2023.
If you took time off, I hope it was a good and relaxing stretch. Some people are still away from the office this week, so we will use the next two days to return to a regular routine.
Several members emailed me over the break about Apple topics and developments that popped up in the news (China, stock price volatility, demand issues, risks in 2023). We will get to those topics, including my broader thoughts heading into 2023.
For today, we will focus on a topic that was initially not going to be on my “key discussion topics” list for 2023: electric vehicles.
Let’s jump right in.
Apple’s Transportation Ambition
Two weeks ago, the newest Above Avalon Report, “Project Titan: Apple’s Transportation Ambition” was published. You can find the report in your inbox – it was sent out December 22th at 10:48 pm ET. To those members who recently joined, you can access the report via the archive here.
Having a report dedicated to Project Titan has been on my to-do list for some time. It had become difficult for members to go through dozens of updates to piece together the history and motivation behind Project Titan.
Over the years, the Project Titan topic has become unwieldy at times. Periodic reporting has had a very short-term perspective, rarely providing readers the big picture. One is typically left with the impression that Titan is a revolving door within Apple with management constantly changing long-term objectives. That’s not reality.
An Above Avalon membership is required to continue reading this update. Members can read the full update here. An audio version of this update is available to members who have the podcast add-on attached to their membership. More information about the podcast add-on is found here.
(Members: Daily Updates are always accessible by logging into Slack. If you haven’t logged into Slack before, fill out this form to receive an invite.)
Above Avalon Membership
Payment is processed and secured by Stripe. Apple Pay and other mobile payment options are accepted. Special Inside Orchard bundle pricing is available for Above Avalon members.
More information about Above Avalon membership, including the full list of benefits and privileges, is available here.
Apple Year in Review 2022 (Financial Strategy) - Daily Update
Hello everyone.
Happy Tuesday.
Reports. A new Above Avalon Report will be published on Thursday – December 22nd. Keep an eye out for it in your email inbox. Those with the podcast add-on will see the new episode appear in your podcast players shortly thereafter.
Above Avalon Gifts - DEADLINE. The final day to gift an Above Avalon subscription is Saturday (December 24th). The gifting page will be taken down on December 24th at 10 pm EST. While all gifted subscriptions will officially begin on January 4th, 2023, your gift recipient will be able to use their subscription as soon as they are informed of the gift. This means gift recipients will have access to the member archive, and the daily podcast / Inside Orchard if that is their purchased gift, over the holiday break.
Thank you to those of you who have already purchased gift memberships this holiday season. Gifting volume has already exceeded last year’s volume. A big thank you to those members who purchased gifts. More information on Above Avalon Gifts (and payment forms) is available here.
Let’s jump into today’s update.
Apple Year in Review 2022 (Financial Strategy)
For Apple, one way of recapping the past 12 months is to look at the company from two perspectives: products and financials. In yesterday’s update, we looked at Apple's product strategy. Today, we will look at Apple's financials.
(For today’s discussion, we will look at FY numbers, which reflect September 2021 to September 2022 trends. If there are significant differences between FY22 and CY22 results, additional mention will be made.)
Due to the pandemic and the resulting impact on shipping logistics, supply chains, and component availability, it’s been a few years since we had a clean look at Apple’s growth fundamentals. Strong revenue growth in 2021 (33%) as a result of an easy year-over-year contributed to slowing revenue growth across the board in 2022 (8%). Backing out FX impact, Apple would have seen double-digit revenue growth.
An Above Avalon membership is required to continue reading this update. Members can read the full update here. An audio version of this update is available to members who have the podcast add-on attached to their membership. More information about the podcast add-on is found here.
(Members: Daily Updates are always accessible by logging into Slack. If you haven’t logged into Slack before, fill out this form to receive an invite.)
Above Avalon Membership
Payment is processed and secured by Stripe. Apple Pay and other mobile payment options are accepted. Special Inside Orchard bundle pricing is available for Above Avalon members.
More information about Above Avalon membership, including the full list of benefits and privileges, is available here.