There’s no sugarcoating it. Apple stock (NASDAQ: AAPL) is taking it on the chin today (Thursday, Jan. 3) and taking much of the stock market with it.
AAPL shares were down about 9% in early trading following a rare earnings warning from CEO Tim Cook. How rare? The last one was issued by Steve Jobs – in 2002.
The Apple stock price is now down about 37% from its all-time high of $233.47 reached on Oct. 3. The steep decline has Apple investors worried, but this isn’t as bad as it looks.
Here’s what’s going on. The part of Cook’s letter that has Wall Street panicking is a revision to the revenue guidance for the just-ended quarter (Apple’s fiscal Q1).
In its last earnings call, Apple said it expected revenue for Q1 to fall between $89 billion and $91 billion. Cook’s letter lowered that figure to $84 billion – a drop of about 7%.
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That’s bad enough. But Cook said the main reason for the revision is lower-than-anticipated iPhone sales in China. Given Wall Street’s long obsession over any hiccup in iPhone sales, this news was more than enough to send the stock tumbling.
Cook pointed to the Chinese economic slowdown as well as U.S. President Donald Trump’s increasingly damaging trade war as root causes for its difficulties in China. He added that sales in China of Apple’s other products, such as the Mac and iPad, were also lower than expected.
While this is certainly not good news, investors need stay focused on the big picture here. One difficult quarter doesn’t mean Apple’s sales in China are now doomed to spiral downward. (Not helping: a gratuitous report from Citi entitled “What if China Sales Went to Zero?”)
Most news reports are ignoring elements of Cook’s letter that indicate the sky is not in fact falling…
Why You Shouldn’t Sell Your Apple Stock Now
For example, Cook said Apple is still expected to report a new all-time record for earnings per share. And the outlook for gross margins remains the same, at about 38%.
Cook noted that despite the issues in China, Apple will report revenue records in many other countries, including the United States, Germany, Korea, Mexico, and Malaysia.
Non-iPhone revenue grew almost 19% year over year, Cook added, with wearables (the Apple Watch and AirPods) growing by an impressive 50%.
Cook also mentioned the continuing growth of services revenue, a piece of Apple’s business we at Money Morning have been focusing on for the past several years.
Investors should keep in mind that Apple is transitioning from a hardware business to a services business. That means glitches in quarterly iPhone sales will matter less in years to come, as services becomes the more meaningful source of revenue.
So if you hold Apple stock now, resist the urge to dump it – it will recover and then some. And if you don’t own AAPL stock, now is a great time to buy. I still believe Apple can reach $300 by 2020, which represents a gain of more than 100% from the current depressed price.
This storm will pass.
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This post is from MoneyMorning. We encourage our readers to continue reading the full article from the original source here.