Apple's stock posted record highs after blockbuster earnings — but these 3 worries stood out on the analyst call

Reuters
  • Apple’s fiscal fourth-quarter report offered little bad news, with sales and profits surpassing analyst expectations.
  • CEO Tim Cook’s call with analysts offered additional detail around the company’s strong trends, but also included a few warnings for what may threaten Apple’s hot streak.
  • Analysts’ concerns around foreign exchange losses, TV Plus trial conversions, and trade-war expectations were the biggest worries following the third-quarter report.
  • Watch Apple trade live here.

Apple’s fiscal fourth-quarter report was rife with good news for worried investors.

The tech giant traded as much as 2.3% higher Thursday after beating estimates for both quarterly revenue and earnings. The company’s bet on Services continued to pay off, and its Wearables sector is nearing the size of its older Mac business. iPhone revenue continued to fall, but positive trends for iPhone 11 sales partially offset the slowdown.

Yet CEO Tim Cook’s Wednesday call with analysts included a few warnings for what may threaten the company’s hot streak. Apple has kept sales strong amid recession warnings and the US-China trade war, but analysts had new worries to press the company’s leadership on.

Here are the three biggest concerns mentioned in the fourth-quarter analyst call.


Foreign exchange hits

REUTERS/Mariana Bazo

Apple’s chief financial officer was quick to identify foreign-exchange losses as a significant issue, naming the concern after just the second question of the call.

“Foreign exchange for us continues to be probably the biggest headwind that we got right now,” Luca Maestri said.

The CFO added that Apple faces a $US1.1 billion hit from foreign exchange woes, and a higher mix of product revenues during the holiday season will contribute to additional margin pressures.

Maestri later noted that lower commodity prices helped offset some foreign exchange losses, but volatility in both international currencies and material costs will leave future projections hinging on several global factors.


Service bundling

Steve Kovach/Business Insider

Goldman Sachs raised concern in September around the tech company’s TV+ trial accounting and issued the lowest price target for Apple stock among major research firms.

Apple’s new method would consider the 12-month TV Plus trial a discount on hardware sales. The investment bank argued the new method could drag devices’ average selling price without a discount to cost of goods sold.

“Though this might appear convenient for Apple’s services revenue line it is equally inconvenient for both apparent hardware [average selling price] and margins in high sales quarters like the upcoming FQ1’20 to December,” the team said.

Apple’s CFO addressed the issue Wednesday, focusing on the company’s methodology for forecasting TV Plus conversions.

“We need to make some assumptions around the take rate of our customers on Apple TV Plus, right?” Maestri said. “And we don’t want to get into the details of that because we view those assumptions as confidential and completely sensitive.”

The CFO noted factors such as family sharing usage, multiple device purchases and availability of local content will be considered in forecasting a take rate, and that such assumptions “will possibly change over time.”

Apple previously disputed the Goldman note, stating the company doesn’t expect the new accounting “to have a material impact on our financial results.” However, the call didn’t offer much new information on the updated accounting, leaving analysts and investors in the dark on how worse-than-expected conversions could hit hardware revenue.


Tariff fears

AP Photo/Pablo Martinez Monsivais

The US and China are closer than ever to inking a partial trade deal, and any progress toward resolving the lengthy conflict is good news for Apple. The tech company currently pays tariffs on several of its products, and Tim Cook was optimistic that the two nations would end the trade war soon.

“My view is very positive in terms of how things are going. And that positive view is obviously factored into our guidance as well. The tone, I think, has changed significantly,” the chief executive said.

Yet recent updates signal a truce may face even more hurdles. Chinese government officials told Bloomberg in October they doubt a long-term deal will come to fruition, as the nation isn’t willing to budge on key concessions requested by the US, including data sharing and communications.

Should the negotiations sour, Apple may be forced to adjust its guidance lower. Cook has been quietly trying to influence the situation through meetings with the president, and Trump told reporters in August that Cook made a convincing argument that the trade war was helping non-US competitors.

Apple asked the White House for additional tariff exemptions Friday, Bloomberg reported, just two days after its earnings call. The waivers would negate 15% duties on iPhone parts, AirPods, Apple Watches, and other products if approved.

Though Apple maintains a hopeful outlook for the US-China tensions, the trade war remains a source of tremendous uncertainty for the tech company and the global economy alike.


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