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July 31, 2019, 7:29 a.m. EDT

Apple surges toward trillion-dollar status again after an unlikely performer saves the day

Wearables category extends its lead on the iPad business, which analysts say underscores success in diversification strategy

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By Emily Bary


Bloomberg News
A Citi analyst says Apple’s watch bands are selling well.

Even as Apple Inc.’s iPhone revenue once again disappointed, the company was able to lean on an unexpected star.

Apple /zigman2/quotes/202934861/lastsale AAPL -1.44%  managed to beat overall revenue expectations despite falling short on iPhone and services revenue thanks to a big quarter for its wearables business, which grew about 50% in the period.

Apple’s wearables unit is a broad segment of the business that also includes home and accessories products, and while it’s been posting strong growth for some time, it still had room to positively surprise by a wide margin in the June period.

“Read this slowly and ponder it: Apple’s wearable, home, & accessory category is larger than iPad sales,” Citi Research analyst Jim Suva wrote in a note to clients Wednesday. “This underscores a new theme that is starting to emerge from Apple, which we believe investors are overlooking and that is the diversity of Apple’s offerings.”

Suva said that while a big part of the bull case for Apple revolves around services opportunities and the bear case hinges on tough times ahead for the iPhone business, Apple’s traction with a broader suite of offerings is encouraging. He called out watch bands as a strong performer as of late, while keeping a buy rating on the stock and upping his price target to $250 from $205.

Don’t miss: The iPhone just did something it hasn’t done in nearly 7 years, and it isn’t good for Apple

The stock was up 4.4% in premarket trading Wednesday and poised to notch a $1 trillion valuation yet again, though that would be based on an older share count. Apple is expected to give an updated count in a Securities and Exchange Commission filing later in the day that will likely be smaller than its old figure due to the pace of the company’s share repurchases, meaning that Apple might not be above the trillion-dollar mark with the new count.

Oppenheimer analyst Andrew Uerkwitz also cheered “outstanding wearable and service momentum” in the latest quarter, keying in on management’s disclosure that more than 75% of Apple Watch customers in the period were buying their first ever Apple Watch.

“With more high-utility functions such as ECG and irregular rhythm notification, we believe there is untapped service revenue potential from Apple’s wearable products,” he wrote. Uerkwitz rates the stock at perform.

Opinion: All hopes for AMD now rest on the holiday season

Evercore ISI’s Amit Daryanani said that the results showed how Apple’s “revenue diversification is working” as iPhone revenue dipped to less than 50% of overall sales.

“While bulls and bears will debate the print, we think an impressive print like this one highlights Apple’s platform model and their ability to show revenue growth despite double digit iPhone sales declines,” wrote Daryanani, who has an outperform rating on the stock and hiked his target price to $238 from $227.

Though newer revenue sources stood out in the latest numbers, analysts of course couldn’t ignore the iPhone business, which is still Apple’s largest line item. Wells Fargo analyst Aaron Rakers said that even though the iPhone segment stabilized in the quarter, he’s not ready to jump on the bull train just yet.

“We continue to be cautious on near-term iPhone demand as we think investor sentiment is more notably focused on iPhone expectations into a 5G upgrade cycle in 2H2020,” he wrote.

See also: Analyst sees ‘compelling’ reason to buy forthcoming iPhone models

Rakers has a market perform rating on the stock and a $215 target.

Apple shares have gained 32% so far this year, while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.69% , of which Apple is a component, has risen 17%.

/zigman2/quotes/202934861/lastsale
US : U.S.: Nasdaq
$ 241.41
-3.52 -1.44%
Volume: 32.47M
April 3, 2020 4:00p
P/E Ratio
19.07
Dividend Yield
1.28%
Market Cap
$1056.28 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
21,052.53
-360.91 -1.69%
Volume: 451.62M
April 3, 2020 5:10p
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Emily Bary is a MarketWatch reporter based in New York.

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