By Callum Turcan
Several large tech companies reported earnings this week including three of the top holdings in our Best Ideas Newsletter and Dividend Growth Newsletter portfolios.
Apple
On October 30, Apple Inc (AAPL) reported fourth quarter earnings for fiscal 2019 (three month period ended September 28) that saw GAAP revenues shift higher by 2% versus the same period last year, hitting $64.0 billion. Its services revenues jumped up by 18% year-over-year while its products revenues declined by a bit over 1% year-over-year, highlighting Apple’s focus on higher margin services sales opportunities. Even so, Apple’s GAAP gross margin fell by over 30 basis points year-over-year due in part to the negative impact of the US-China trade war on top of an unfavorable product mix (less iPhone sells, greater iPad sales on a year-over-year basis).
Only Apple’s Americas and Rest of Asia Pacific (ex-Japan and Greater China) segments reported year-over-year sales growth last quarter, the rest of its geographical segments posted revenue declines. A 9% year-over-year increase in Apple’s GAAP operating expenses (greater R&D and SG&A expenses) along with weaker GAAP gross margins saw the firm’s GAAP operating margin decline by over 120 basis points year-over-year in the fourth quarter.
Apple maintained its free-cash-flow cow status in fiscal 2019, churning out $58.9 billion in free cash flows. That easily covered $14.1 billion in cash outlays to cover dividend and dividend equivalent payments that fiscal year. Share buybacks of $66.9 billion, a truly monstrous sum, were covered through free cash flows and cash on hand. Apple exited fiscal 2019 with $205.9 billion in cash, cash equivalents, short-term marketable securities, and long-term marketable securities on hand versus $102.1 billion in total debt. Even after repurchasing a ton of its stock (diluted outstanding shares fell by 7% in fiscal 2019 versus fiscal 2018 levels), Apple’s balance sheet remains pristine.
The top end of our fair value estimate range sits at $280 per share of AAPL, which we think the firm may test over time. We continue to like Apple as a top holding in our Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Shares of AAPL were up in after-hours trading on October 30.
On October 30, Facebook Inc (FB) reported third-quarter 2019 earnings that saw GAAP revenues jump higher by 29% year-over-year to $17.7 billion. While GAAP operating expenses marched higher by 32% year-over-year, indicating slight margin contraction (R&D, G&A, and marketing & sales expenses all shifted higher as Facebook’s headcount rose 28% year-over-year), a marginal decline in the firm’s outstanding diluted share count helped boost Facebook’s GAAP diluted EPS by 20% year-over-year to $2.12 in the third quarter. Facebook’s advertising revenues were up 28% year-over-year, aided by the social media giant’s daily active user count rising 9% to over 1.6 billion users in the third quarter. The firm’s monthly active user count was up 8% year-over-year, hitting 2.45 billion users, and mobile advertising revenue continued to represent the lion’s share of Facebook’s total advertising revenues.
Facebook generated $16.2 billion in free cash flows during the first nine months of 2019, while spending $2.9 billion repurchasing its common stock. The company exited September 2019 with $52.3 billion in cash, cash equivalents, and marketable securities on hand with no debt on the books. Facebook’s strong free cash flows, pristine balance sheet, rising user base around the world, and promising growth trajectory represent several of the key reasons why we include FB as a top holding in our Best Ideas Newsletter portfolio.
Our fair value estimate for shares of Facebook stands at $234, far above where shares are trading at as of this writing. Facebook has come under fire over fears regarding the regulatory landscape it faces in the US, UK, and Eurozone, however, we see those fears as overblown when it concerns the enormous discount FB trades at relative to its intrinsic value (keeping short- and medium-term headwinds in mind). Shares of FB were up decently in after-hours trading on October 30.
Alphabet
On October 28, Alphabet Inc (GOOG) (GOOGL) reported third quarter 2019 earnings which saw strong revenue growth but also significant increases in its operating expenses as well. The tech giant’s GAAP revenues climbed 20% year-over-year to $40.5 billion in the third quarter while GAAP operating expenses rose by 25% year-over-year to $31.3 billion, ultimately leading to its GAAP EPS declining by 23% year-over-year to $10.12 on a diluted basis (share buybacks modestly offset weaker GAAP operating margins). Top-line growth was driven by rising mobile search, YouTube, and cloud-related revenues while operating expenses grew due to meaningful investments in cloud infrastructure (data centers) and talent (Alphabet’s workforce grew by 21% year-over-year).
Alphabet ended the third quarter with $121.2 billion in cash, cash equivalents, and marketable securities on hand versus $4.1 billion in long-term debt. Its colossal net cash position is made possible through its stellar free cash flow profile. During the first three quarters of 2019, Alphabet generated $22.6 billion in free cash flows and spent $12.3 billion repurchasing its stock. We continue to like Alphabet, specifically Class C shares, as a top holding in our Best Ideas Newsletter portfolio and our fair value estimate sits at $1,440 per share of GOOG, indicating shares have room to run higher. Shares of GOOG moved a touch lower after its third quarter report but remain up almost 21% year-to-date as of this writing.
Computer Hardware Industry – AAPL BB HPQ IBM TDC
Internet Content & Services Industry – GOOG GOOGL BIDU FB JD TECHY TWTR
Related: BKNG
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Callum Turcan owns shares of Apple Inc (AAPL) and Facebook Inc (FB). Shares of Alphabet Inc (GOOG) (GOOGL) Class C, Booking Holdings Inc (BKNG), Facebook Inc, and Apple Inc are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Shares of Apple Inc are also included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.