After International Business Machines Corp. (NYSE:IBM) reported a drop in profits in its quarterly results, Apple stock investors may think twice about Apple Inc. (NASDAQ:AAPL).
Strong sales of iPhones are hardly assured. Even though valuations between the two companies are similar on a forward price-earnings basis (12 for IBM and 13.8 for Apple), Apple will probably please the market when it reports results next month.
Investors should also ignore rumors about the iPhone 8. Sales for the existing models are only starting to ramp up now.
iPhone 8 Versus Samsung Galaxy S8
Apple’s impending release of an iPhone 8 would mark the tenth-anniversary for the device. Yet the company just released the iPhone 7 in September 2016. Refreshing the model just after a year may not make much sense. Apple stock isn’t under significant pressure by competition from Samsung Electronics (OTCMKTS:SSNLF) or any other Android device maker.
Still, consumers may overlook the expensive initial price of nearly $800 for the Galaxy S8. Samsung is releasing the latest phone on April 21. Fans may like the Galaxy S8’s biometric scanners, which include iris and fingerprint scanning. Those are some of the ways the phone may get unlocked.
Samsung will introduce an assistant named Bixby, but this feature could underwhelm its users. Chances are high that the AI software will be buggy and will need fixing. That is typical for any technology product that is in its first generation.
By comparison, Apple introduced Siri on the iPhone 4S, way back in October 2011. Bixby is competing against six years of iterations on Siri.
Expectations for Second Quarter
Analysts expect Apple will report revenue in the range of $51.7 billion to $54.6 billion. That translates to earnings of between $1.91 to $2.14 per share. If Apple meets those expectations, that would imply revenue growing in the single digits, at around 5%. The company will likely report that its cash balance grew again. Apple stock ended its last quarter with $230 billion in offshore cash.
The massive cash balance will only fuel rumors of the company making a big acquisition. Apple stock is strategically better positioned if it waits for the government to allow for repatriating the cash at a lower tax rate. The company may invest the proceeds in the business or make smaller, local acquisitions. Historically, Apple does not buy companies in the $100 billion range. Its biggest acquisition to date was Beats Electronics for $3 billion in August 2014.
Diversifying Business Through Autonomous Driving
Apple’s management may give more details on its ambitions in building self-driving car technology. On April 14, the company received a permit that allows it to test auto-driving cars in California. Tesla Inc (NASDAQ:TSLA) need not worry about Apple as a competitor. Apple is working only on the software part of ADAS (Advanced Driver Assistance Systems).
Tesla develops both the all-electric hardware and the software. Still, staying away from the hardware aspect of automotive development should keep profit margins high for Apple. Car manufacturing is inherently a low-profit business. Similar to Microsoft Corporation (NASDAQ:MSFT) selling Windows software and not low-commodity PCs, Apple will sell the software that self-driving cars will use.
Apple is very deliberate on the products it produces. The company is in no rush to release the next iPhone 8, but it is keen on diversifying its business outside of smartphones. Apple’s progress in developing autonomous driving software ultimately makes the company a solid investment for long-time shareholders.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
