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Apple's revenue should continue to decline, so why are stocks up?

Apple Inc. announced a sharp decline in revenue for its holiday quarter. This was not a surprise.

What may follow The company released a weaker-than-expected sales forecast for the current quarter, suggesting that a slowdown in iPhone sales could lead to a significant decrease in revenue in the future.

Analysts had already expected a small decline in revenue for each quarter of the current fiscal year before Apple

Aapl -1.04%

on Tuesday published a forecast for March, indicating revenue from 55 to 59 billion dollars for the quarter compared to the FactSet consensus of about 59 billion dollars and a total of 61.1 billion dollars in the previous year.

Live Blog Resume: Apple Earned More Shares

This type of sales decline does not usually lead to an increase in stocks, but Apple shares rose by more than 5% after hours, leaving one question: why?

Wedbush analyst Daniel Ives gave three reasons for a phone call on Tuesday, starting with the earnings forecast. Although he was below analysts' consensus expectations, Ives said he is still higher than the market feared.

"There was a fear that they could lead to an amount of less than 55 billion dollars," Ives said.

Two other factors were related to the Apple services business, which the company stressed because of the stagnation of iPhone sales. While iPhone revenue fell by 15% from the last quarter of holiday shopping, software and services revenue increased by more than 19% after normalizing to change the rules for recognizing revenue. Ives pointed to two specific disclosures from Apple: gross profit and the number of users paying a subscription.

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The gross margin for the services business was a peaceful offer that Apple offered, removing single sales of certain products, such as iPhones, trading a metric that would not look good for Apple. Apple said its gross margin for services such as Apple Music, iCloud and Apple Pay was 63% this quarter, which, according to Ives, was better than expected.

“The line in the sand made up 60% gross margin,” said an analyst, whose Apple rating outperforms the $ 200 rating. “The services business may have been something [investors] were undervalued in terms of how profitable this is. "

Ives compared this with Amazon.com Inc.

AMZN, -2.69%

a breakthrough in the performance of its cloud computing division, which also offered a look at a higher-yielding business that was diluted by a much larger core business with a lower margin.

“When Amazon set AWS margin, it was a defining period for Amazon, because investors started giving them more loans,” he said.

What's more: Amazon’s revenue growth engine has nothing to do with e-commerce

The type of revenue Apple collects through these companies is also important. Ives pointed out the number of paid subscriptions that Apple has as an important disclosure, as it is a permanent source of income, which is more predictable, which is a key factor for Apple, since iPhone users on average wait longer before buying a new phone.

“We now have over 360 million paid subscriptions in our portfolio of services, which is 120 million more than a year ago,” said Chief Financial Officer Luca Maestri on Tuesday at a conference call. "Given the continuing strength and momentum in this part of the business, we expect that the number of paid subscriptions will exceed half a billion during 2020."

BTIG Water Piecyk analyst pointed to another figure in Apple's forecast: for a total gross margin from 37% to 38%, the profit signal will not decrease with income.

“The good news is that a lower income forecast, probably partly due to lower prices in some markets, did not lead to a weak gross margin forecast, which was another relief for investors who fear the worst,” writes Piečik, subtracting 6 billion dollars in the 2018 iPhone. Sales, he estimates, are due to a weak forecast. He also lowered his target price to $ 189 from $ 197 on Tuesday evening.

In general, Apple’s jump in stocks at the close of trading on Tuesday feels like a relief, as investors received information that was not as bad as they feared, amid a 27% drop in the last three months, the period during which the S & P 500 index

SPX, -0.15%

was mostly break-even. However, this type of rally may not last long, as it depends entirely on how Apple fulfills its promises on Tuesday.

"Now it all comes down to the March leadership – it’s imperative that they hit," Ives said, noting a big blunder in the original forecast for the holidays, which required an early warning from Apple. "There is a big problem of trust in terms of forecasting iPhone sales."

Updated with additional analyst comment.

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