Stocks Were Up, Ending Their Best Month Since January

The end of the month can be a curious time because there is occasional window dressing where fund managers try to make their portfolio look good for their investors. The action on Tuesday was fairly normal. July ended up being the best month since January as the S&P 500 was up 3.6%. The S&P 500 is up 5.34% year to date which is great performance, but it still feels like the market is down because it is below its record high. With Apple’s solid result, which I will discuss in this article, the big tech names don’t look too bad overall. There should be enough leadership to carry the market to a record in August. As for the near term, the CNN Fear and Greed index is once again showing the market is overbought as it is at 66 out of 100. I am not confident the market will hit a record high without a small pullback of 3%-5%.

Leadership Is Everything

On Tuesday, the S&P 500 was up 0.49%, the Nasdaq was up 0.55%, and the Russell 2000 was up 1.07%. It is easier for Apple to power gains than the other momentum names because it is larger. It’s also in the Dow. The reason I focus on the leadership is because it drives returns. As you can see in the chart below, the best 20% of all stocks accounted for all the gains from 1989 to 2015. As you can see, we aren’t in unusual times. This isn’t a tech bubble because the biggest tech firms are driving markets. To be clear, it’s fair to be bearish on some of the tech names. However, they aren’t bubble because of their enormous profit and revenue growth.

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Apple Beats Estimates

Yesterday, Apple reported a great quarter as it beat EPS and revenue estimates. The only weak point was the miss in iPhone shipments, but that was made up by the increase in the average selling price of the devices. This led Apple stock to go up 4.03% in the after hours session on Tuesday. It needs to go up 6% to reach a $1 trillion market cap. It will be the first to reach that milestone like I expected.

EPS was $2.34 which beat estimates for $2.18 Revenues were $53.3 billion which beat estimates for $52.34 billion. iPhone sales came it at 41.3 million which missed estimates for 41.79 million. The chart below shows iPhone shipments were flat year over year. Apple was genius to realize the market was saturated. The best way to grow profits is to increase prices. That’s a unique strategy in the consumer electronics category because prices usually fall. However, the smartphone is the most important item most people own. It is more important to young people then their car. I know this because young people are getting their licenses later in life and are spending more time on their smartphones.

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ASP Drives Gains

As you can see from the bottom left charts, the iPhone’s average selling price was $724. That beat estimates for $699. The beat was driven by iPhone X sales as it costs $1,000. It is way higher than the year ago quarter as the average selling price was $606. The 12 month average quarter over quarter average selling price growth was 4.3%. Apple is said to be coming out with 3 phones this fall. Apple needs to make the two more expensive devices significantly better than the cheaper one to push up the ASP. It’s rumored that the cheaper one will have an LCD screen and the more expensive ones will have an OLED panel.

Weak iPad & Mac, But Strong ‘Other Products’ & Services

iPad and Mac had weak sales growth. Specifically, quarter over quarter trailing 12 month shipment growth of iPads was 0.3%. Mac shipment growth was -3%. The iPad is more feature rich than ever before as it rivals the performance of laptops. That explains why sales are weak because smartphones have taken share from laptops. The two products do two separate things, but for people looking at social media and videos, a smartphone can replace a computer. Tablets, laptops, and desktops have become mainly work devices.

The biggest growth categories for Apple besides the increase in prices paid for iPhones are the ‘other products’ category and the services category. One of Apple’s biggest strategic advantages is that the smartphone is a gatekeeper for content consumption. Also, iPhone users spend more money than Android users. Apple is in an amazing position to monetize its customers by selling them services such as iCloud and Apple Pay. The company had 50% cloud revenue growth. Apple Pay had over 1 billion transactions which is triple from last year.

The services division had $9.55 billion in sales which beat estimates for $9.21 billion. This is 28% year over year growth and 6.8% trailing 12 month quarter over quarter growth. The long term goal is for revenue growth to double from 2016 to 2020.

The ‘other products’ division had $3.74 billion in sales which beat estimates for $3.67 billion. This was 37% growth in products such as the Apple Watch, AirPods, Beats headphones, and HomePod. The company saw 60% growth in wearables and 6.5% quarter over quarter 12 month trailing average revenue growth in ‘other products.’

Strong Guidance

We’ve seen firms such as Amazon, Netflix, Twitter, and Facebook all issue weak guidance. Apple isn’t a part of that list as revenue guidance is for between $60 billion and $62 billion which is above the estimate for $59.47 billion. One weak part of the quarter is greater China saw a 29% decline in quarter over quarter revenue growth. Overall, this was a good quarter which makes me a believer in the services story. I don’t believe the company can perennially raise prices on iPhones to increase profit growth. With services doing so well, market share might become more important than profits on device sales. That’s why the cheaper iPhone will be important.