If you read yesterday's Market Musings you will be aware that I am not what you would call optimistic about stocks in the short-to medium-term. We have been aggressively bouncing back from the low based on an assumption that everything is getting back to normal quickly, when the facts suggest that is a long way from reality. Over 30 million people have lost jobs in the last few weeks and most economists are predicting a thirty or forty percent hit to GDP. There is no model to predict what long-term damage that does, and yet April was a big month for the S&P 500. Something has to give.
At some point, though, the economy will recover, and as we go through earnings season, it is worth picking through some releases to look for long-term trends that will make stocks big winners when they do.
Take Apple (AAPL), for example.
Before we get into the meat of the earnings, there is something else interesting that happened yesterday as the numbers were published. The immediate post-release gyrations of that stock demonstrate the inherent inefficiencies of headline-driven markets, particularly those where algorithms make the immediate decisions.
The two headline numbers, EPS and revenue were both good on a relative basis. EPS of $0.55 was nearly 30 cents above the consensus estimate, while revenue of $58.3 billion was also over the expected number. That presumably caused the initial pop, but right now, historical performance counts for little. What people want to know is what corporations think the future holds, and as Apple’s views on that were digested literally a minute later, the stock gave back all its gains and more.
Like many companies this quarter, Apple refused to give forward guidance in this release. That is perfectly understandable, but still seems to have worried traders. I said yesterday that corporations have their fingers on the pulse of the economy and that their refusal to look forward suggests that they are barely discerning a heartbeat. Apple has a finger on that pulse like no other. They supply individual consumers, businesses and governments all round the world, and if they don’t know what the future holds, how can we?
To be honest, though, I don’t see why any CEO would put a number on what they anticipate for the next few months in the current environment. Nobody is doing it, so the old Abraham Lincoln quote applies: It is better to keep silent and be thought a fool than to speak and remove all doubt.
So, without an interpretation from Apple themselves of the implications of their Q2 performance for the future, we have to dig a bit ourselves and form our own conclusions. When I do that, this release actually makes me more bullish on AAPL’s long-term prospects than I was before.
That revenue number was remarkable. It represents a small increase on the $58.02 billion of sales in the same quarter last year. That’s right, in a quarter that included a month when the world’s economies were decimated and Apple closed most of their stores around the world, revenue increased! And, as we have come to expect from AAPL, that revenue generated cash. Cash flow from operations increased a massive 20% YoY.
Those numbers are bullish enough in themselves, but the reason for the anomaly is the real reason Apple looks like a good long-term bet. Even with iPhone sales declining 7%, revenues have grown because of a big increase in revenue from services. I have said before that a transition to a recurring source of sales is the key to Apple’s long-term growth and, pandemic or not, that seems to still be happening.
Even with all that, I wouldn’t be in a hurry to buy AAPL, or anything else for that matter right now. I still believe the market has some catching up with reality to do and we could have a rough week or two as that happens. However, when the time does come to buy again, AAPL will be one of the first on my shopping list.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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