If you own AAPL stock, now is not the time to panic sell. But if you were thinking of buying on the dip, you’d be better off waiting a bit.
That’s the advice of Money Morning Capital Wave Strategist Shah Gilani, who still believes Apple Inc.’s (NASDAQ: AAPL) fundamentals are sound, but has concerns about the overall market dragging the big tech stocks lower.
“Apple has a way to go. Don’t go bottom fishing yet,” Gilani said. “Watch the markets and look for a place to get in.”
Here’s why Apple stock has been sliding…
Apple Stock Slammed by Surprise Announcement
Apple stock was down almost 7% Friday to about $207.48 following a troubling earnings report. The sell-off continued today (Monday) with AAPL shedding another 4% to slip below $200 in early trading.
Apple’s guidance for the current quarter, historically its biggest, came in below expectations.
What alarmed Wall Street the most, though, was Apple’s announcement that it would no longer report product unit sales, just revenue. So in the future, investors will have no way of knowing if Apple is selling fewer iPhones, Macs, and iPads.
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The removal of this key metric, combined with an already volatile market, will put sustained pressure on the AAPL stock price.
One of the first support areas would be between $185 and $191, a range where Apple stock traded for about three months in late spring to early summer.
That’s where investors should start buying, although if the overall market takes a tumble – something Gilani sees as a distinct possibility given the anxiety over earnings, U.S. President Donald Trump’s trade wars, and an increasingly toxic domestic political atmosphere – they could find even cheaper entry points.
“It’s not about fundamentals now,” he said. “The psychology has changed.”
Getting lost in the reaction is that Apple actually had a pretty good quarter.
Take a look at the numbers…
Apple Is Still Raking in Billions
For its fiscal Q4, Apple reported earnings of $2.91, beating the forecast for earnings per share (EPS) of $2.78. That’s an impressive 40.58% year-over-year increase in profits.
Revenue of $62.99 billion was 20% higher from the year earlier, exceeding analyst expectations for sales of $61.44 billion. Apple had double-digit sales increases in all but one of its geographical areas, including an 18% year-over-year increase in Europe, a 34% increase in Japan, and a 16% increase in Greater China.
The average sales price (ASP) of the iPhone was $793, easily beating expectations of $729 and representing a 28% increase over last year’s ASP.
But it wasn’t all positive. Apple missed expectations for the number of iPhones sold (46.9 million versus 48.4 million) and its guidance for Q1 revenue of $89 billion to $93 billion was on the low end of the forecast for $92.74 billion.
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Mac sales were flat, while iPad sales were down 6% year over year.
These numbers partly explain why Apple is changing its policy on reporting unit sales. Over the past year, most of revenue and profit growth has come from increased prices on its hardware, not the sale of more units.
It’s disappointing that we won’t be getting those unit numbers in the future. But it doesn’t necessarily signal the demise of Apple’s growth story…
Why My AAPL Stock Price Prediction Is Still $300
Back in August, I wrote that Apple stock would reach $300 a share by 2020. And what happened last week hasn’t really changed my mind.
I believe Apple has a plan to feed earnings growth that takes into account slowing iPhone sales, and that we’ve already started to see part of it unfold.
The foundation of this plan is the growth of services revenue. Services include such things as Apple Music, its iCloud service, and the App Store. In 2017, the company set a goal of doubling service revenue by 2020 from 2016’s numbers ($24.3 billion).
Services revenue matters for two reasons: 1) it represents steady income and 2) the profit margins are about twice that of hardware.
Another earnings reporting change is designed to emphasize these higher margins. Apple said in the future it will be reporting the cost of sales metric for total products and total services.
This will become increasingly important as services make a larger contribution to sales.
For fiscal 2018, Services revenue came in at $37.2 billion. And according to FactSet estimates, the segment will contribute $52.8 billion in 2020 (meeting Apple’s goal). But it will keep growing rapidly, hitting $80.65 billion by 2022.
Earlier this week, Jefferies analyst Timothy O’Shea explained how the transition will work:
“We believe AAPL’s stable iPhone business will serve as the foundation upon which it can build a massive, recurring and high margin Services business,” he wrote in a note to clients.
O’Shea said Services could make up 25% of Apple’s revenue by 2020 (it’s about 15% now) and 40% of its profit.
“Applying a higher multiple compared to the lower margin hardware business, we see a significant opportunity for investors as Services alone could be worth $111 to $177 per share by that time,” O’Shea said.
It’s unclear whether this includes Apple’s nascent video streaming service, which is another new business the company is edging into.
I expect that at least internally Apple already has begun to focus more on a different metric – average revenue per user – if it isn’t already.
“It’s part of the maturation process,” Gilani said. “They want to grab recurring revenue as opposed to one-off sales.”
Meanwhile, Apple has another hardware category – wearables – that is still enjoying healthy growth…
Keep an Eye on the Apple Watch
Apple CEO Tim Cook said in the earnings call Thursday that revenue from wearables – the Apple Watch, Beats headphones, and AirPods – had increased 50% year over year. While only 7% of Apple’s revenue, this segment could become a much larger contributor over the next several years.
UBS estimates Apple Watch shipments will grow 40% in Apple’s fiscal 2019, to about 33 million units. The analyst firm said that would add about 5% to the company’s revenue for the year – the equivalent of an additional 15 million iPhones.
And because Apple is so secretive, it’s hard to say what new revenue-generating products it may be working on. Apple continues to ramp up research and development spending, a sign its skunkworks is busy.
As recently as five years ago, Apple spent $4.48 billion on research and development; in FY2018, Apple spent $14.24 billion.
So I don’t think it’s a stretch at all to say AAPL will reach $300 by 2020. The FactSet consensus for Apple’s EPS in 2020 is $14.86. Multiplying that by a price/earnings (P/E) ratio of 18 gets you to $267.48.
But as I pointed out in my August article, analyst estimates for Apple’s earnings two years out tend to be way off – by 20% or more. Just 12% more of $14.86 – $1.80 – puts Apple’s 2020 EPS at $16.66, enough for a $300 share price at a P/E of 18.
I actually think that’s conservative. As Jefferies’ O’Shea noted, the rising share of higher-margin services revenue in Apple’s mix will push the multiple higher. A P/E of 20 puts AAPL at $300 even if the EPS matches the $14.86 forecast.
And if investors follow Gilani’s advice and use market turmoil to buy Apple shares at a lower price, they could see handsome gains. An entry point of $195, for instance, would deliver gains of 54% when AAPL reaches $300 – not counting the dividend.
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