Apple's growth for the next quarter will be driven by everything but the iPhone, Goldman Sachs says
- While several Wall Street analysts have interpreted Apple's earnings beat as a sign that iPhone sales have stabilized, Goldman Sachs says the company's fiscal third-quarter growth will be fueled by other products.
- Those products include the iPad, Mac, and the Apple Watch.
- Apple has been highlighting growing product segments like wearables and services as a bright spot in its quarterly results as iPhone sales continue to decline.
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Apple's fiscal second quarter earnings surpassed Wall Street's expectations, suggesting that the company's slowdown in iPhone sales may have bottomed out and that the stage is set for it to further monetize its 1.4 billion installed base.
But in the near term, it's "everything but" the iPhone that will drive Apple's growth, according Goldman Sachs analyst Rod Hall.
Apple beat Wall Street's estimates on important metrics including second quarter revenue, iPhone sales, and third-quarter revenue guidance, which the company forecasted as being between $52.5 billion and $54.5 billion. That exceeds analyst predictions of $52.2 billion.
And although many investors interpreted Apple's earnings beat as a sign that iPhone sales have stabilized, it's other product areas like the iPad and Mac that will be responsible for driving growth in the third quarter, according to Goldman Sachs. The firm writes:
"Based on management's commentary on non-iPhone seasonality heading into the June quarter and the actual reported segment level revenues, we believe the 2% beat vs. our estimate is primarily due to iPads, Macs, Watches and other non-iPhone items while the iPhone performance remains largely inline with our previous estimate. We believe that new iPad Mini/Air updates, Macs and Airpods should be particularly strong in FQ3 to June."
Apple reported $31.1 billion in iPhone sales, which beat Wall Street's projections of $30.5 billion but still represents a 17% year-over-year decline. However, Apple is seeing growth elsewhere, most notably in its wearables, home, and accessory product division as well as its services and the iPad. Sales of wearable devices jumped by nearly 50%, and Apple CEO Tim Cook told analysts that the company's wearables business is now the size of a Fortune 200 company.
Apple also reported its strongest iPad growth in six years, which was driven largely by the iPad Pro. Additionally, the company has been touting its services business as a key area of growth as it seeks to offset slowing iPhone sales, which grew to $11.5 billion in revenue up from $9.9 billion in the same quarter one year ago. The new services it plans to debut later this year, such as its Apple TV Plus streaming service and Apple Arcade gaming platform, represent new ways to boost this business and further leverage the 1.4 billion Apple devices in use around the world.
Goldman Sachs isn't the only Wall Street firm looking to Apple's other product segments for growth. Beyond the third quarter and looking ahead to the rest of the year, Piper Jaffray said it expects "limited excitement" around Apple's iPhone launches in the fall, and Wells Fargo said it thinks "anticipation of a 5G iPhone in 2020 could impact upgrades." While Apple is rumored to release a trio of new iPhones in the fall that will offer new features like a triple-lens camera and reverse wireless charging, the company is expected to launch a more significant upgrade with 5G connectivity in 2020.
When asked about Apple's plans for a 5G iPhone on its earnings call, Cook remained quiet on the topic. "We look at a lot of things on different technologies and try to select the right time that things come together and get those into products as soon as we can," he said.
Goldman Sachs reiterates its neutral rating.