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Squeeze or be squozen

30 July 2020 By Robert Cyran

Apple has unveiled a reasonably good quarter on Thursday, but it is trading as if it is among the best. Revenue rose 11%, thanks in part to big increases in sales of Macs and iPads to customers stuck at home. Yet investors are betting small pandemic advantages will last, and looming problems, like stricter antitrust action aren’t a huge deal. Both assumptions look too rosy for Apple.

Apple is benefitting from the lockdown, but Microsoft or Amazon.com are both benefiting more. Work from home mandates mean more revenue for both firms’ cloud businesses. Amazon’s online retailing business is going gangbusters. Microsoft revenue rose 13% in the second quarter, while Amazon, which also reported earnings after the close on Thursday, said revenue increased 40%.

The pandemic will continue to make Apple’s growth look less impressive relative to peers. While Apple sells services such as apps and subscriptions, and that revenue rose 15%, the company still made about two-thirds of its revenue from hardware in the quarter, and 44% from selling iPhones, which rose less than 2% compared to last year. Customers’ handsets will eventually need replacing, but that doesn’t fuel growth. And good iPad and Mac growth this quarter probably won’t continue, as there won’t be reason to replace them soon.

That leaves the services business – things like tolls from the app store, Apple Pay, and revenue from Google for making it the default search engine for iPhones. Those divisions should grow, but incrementally, and not so much to justify the current 26 times next 12 month’s earnings multiple, about twice the average multiple from 2015 to 2018, investors are awarding it, according to Refinitiv.

Meanwhile, antitrust risk is increasing. The European Commission launched an antitrust investigation into the company in June. The U.S. is sniffing around too – the antitrust subcommittee of the U.S. House of Representatives brought boss Tim Cook along with executives of three other big firms to testify on their businesses earlier this week. While the pandemic has lifted the entire sector, the rising tide has unfairly brought Apple with it.

 

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