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Apple’s Guidance Shows Pricing Moves Are Paying Off

By Motley Fool Staff – May 8, 2019 at 3:30AM

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Apple’s forecast for the second quarter was surprisingly good.

The market cheered Apple's (AAPL 1.19%) outlook for the second quarter. The rosy forecast shows that some of the moves Apple has been making to improve its competitiveness in certain markets are starting to work. For example, Apple has been absorbing foreign exchange hits and making trade-ins easier, among other efforts.

In this segment, host Dylan Lewis talks Apple with Fool contributor Evan Niu. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 3, 2019.

Dylan Lewis: A really strong reaction to this earnings report. The market was really happy with it. Nothing that we've talked about really raises too many eyebrows so far, Evan. I think that the reason most people were excited was Apple's management said, "Things are going to look a little bit better next quarter than maybe you thought."

Evan Niu: Yeah, their guidance was actually pretty strong, particularly coming off all the pessimism around how badly they missed in the fourth quarter. Their guidance came in above expectations. They're expecting second quarter revenue to be $52.5 billion to $54.5 billion, versus the market was expecting under $52 billion. They're comfortably above expectations there. Gross margin should be around 38%. Tim Cook basically said that Apple is starting to recover in a lot of these key markets where it struggled in the fourth quarter, most notably China. They've been taking a series of measures to try to improve their competitiveness, such as absorbing foreign exchange movements in order to stabilize local pricing. They're reducing a lot of friction related to smartphone trade-ins, a bunch of little levers like that they're pulling. In aggregate, when you combine the effects, I think that's what we're seeing in this revenue forecast that's pretty good. I think it's a testament that those efforts are working, at least if they can hit their forecasts, unlike they did when they missed so badly in December.

Lewis: This is how we got here, right? Yeah, yeah. Of course. [laughs]

Niu: [laughs] So, at face value.

Lewis: Yeah. With them back up to roughly where they were a couple of months back now, I think they're just hovering below that $1 trillion valuation. I will say, if you are a fairly new investor, it's hard to go wrong buying shares of Apple, honestly. But they might not be the greatest mega-cap tech stock out there if you're looking for some serious growth, because they are facing some headwinds with their biggest segment, the iPhone segment. A lot of stuff to like with Services. I'm sitting, I'm hanging out with my shares, basically. I'm holding the shares that I've bought several years back and just enjoying the capital return program, enjoying some of that dividend and the reinvestment there. If I am looking to add to a major tech player, Apple might not be first on my list, just because I'm a little worried about what growth might look like for the next couple of years for them.

Niu: Yeah, I'm in the same boat as you, I'm just sitting on it, not really doing anything with it. I think that one thing that Apple does need to do, looking several years out, is show investors what a post-iPhone Apple looks like, when the iPhone is no longer as big of a part of the business as it has been over the past 10 years. It's very clear that the smartphone market is maturing and saturating. These premium, $1,000 phones aren't selling as many as you need to really keep this business growing the way that it is. What does that look like? They don't have an answer for that yet. But we'll see.

Lewis: Yeah, I think few people do. I will say that they got me. I bought a XR because I was in desperate need of an upgrade. And let me tell you, I feel like I am living the life of luxury right now with my battery life. So I am absolutely thrilled! But yeah, Evan, I don't think that people really have figured out what that next phase looks like. It wasn't the Apple Watch. I don't know that they expected the Apple Watch to be the next "it" category in terms of consumer electronics. We've seen some other phone makers mess around with folding phones. There have been some issues that have come with that. Lots to say here, there are just more questions and answers when it comes to the future of consumer hardware and the thing that everyone's going to have in their pockets. Apple needs to figure that out.

Niu: Yeah. Is there going to be augmented reality glasses? I don't know. Apple self-driving car? [laughs] Who knows?

Lewis: It's one of the more fun things to imagine. We've got time to figure that out.

Dylan Lewis owns shares of Apple. Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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