Should You Buy Apple Inc. (AAPL) Stock? 3 Pros, 3 Cons

Apple could win with tax reform and patent suits, but a soft iPhone 8 launch may still sink the stock

After being one of the cheapest tech companies in the stock market in recent quarters, Apple Inc. (NASDAQ:AAPL) has finally taken off. AAPL stock is up more than 50% over the past 12 months, adding 30% this year, aloneCan the good times continue?

To Apple’s credit, earnings are growing again. After a 9% decline last year, analysts are forecasting a flip back to growth, with EPS expected to increase almost 20%. That’s in large part due to the launch of the iPhone 8, which many people expect will be a huge success.

Some analysts, however, are more cautious on its chances, as AAPL is also dealing with some supply chain issues at the moment. On the plus side, successful patent litigation and tax reform could help swing Apple stock further to the upside.

So, the cases for and against buying Apple shares? Here goes:

AAPL Stock Cons

Supply Chain Problems: Analysts are becoming increasingly concerned about the state of Apple’s supply chain. In particular, analysts have suggested that shortages in OLED screen supply will limit AAPL’s ability to produce enough iPhones to meet demand.

Analyst Rod Hall, at JPMorgan Chase & Co. (NYSE:JPM), trimmed his Q4 iPhone sales estimate by more than 7 million units last week. Though, he suggests, all these lost sales will eventually occur in 2018, preventing damage the Apple’s position. He left his $165 price target intact.

Bank of America-Merrill Lynch took a more drastic perspective. They cut their 2017 phone guidance by 11 million units, and suggest the shortage will bleed into the 2018 fiscal year as well. While the supply chain problem looks to be temporary, investors could punish AAPL stock for a quarter or two.

Potentially No Super Cycle: The banks’ negative chatter isn’t limited to just supply chain problems, however. Deutsche Bank recently suggested that there won’t be an iPhone 8 upgrade super cycle. Deutsche recently raised their price target for AAPL stock. However, it was just to $132, still some serious downside from the current ~$150 level. Their analyst suggested that due to longer upgrade cycles and market saturation, the 8 will fail to live up to expectations.

Mark Moskowitz of Barclays PLC (ADR) (NYSE:BCS) piled on. He suggested that Apple’s new OLED screens will fail to drive much customer enthusiasm as compared with traditional screens. Lacking a new “must have” feature, Barclay’s isn’t bullish on the 8, either.

Too Expensive: Adding to the 8’s potential production problems, it’s looking to come in with a huge price tag. One prominent Apple watcher suggested the high-end 8’s will cost $1,200, and even more for versions with more memory.

Now, it’s inarguable that some consumers are willing to pay a premium for Apple products. The brand is of unimpeachable quality. That said, at what point does sticker shock kick in?

Many American consumers are accustomed to receiving their phones on the cheap due to mobile carrier subsidies. However, the combination of carriers phasing those out and the iPhone 8’s higher-end components could lead to many middle-class customers getting priced out of the market. A phone that sells for more than a nice laptop may be a step too far for many shoppers.

AAPL Stock Pros

Tax Plan: With the Republicans’ long-debated health care seemingly hitting an impasse, the political conversation can finally move elsewhere. It appears the next focus will be on tax reform. The Trump administration really needs a policy win at this point, and a Republican Senate is more likely to push through tax cuts than divisive health care reforms.

Apple’s cash hoard now tops $250 billion, with most of that held overseas. The money could be freed up quite soon and used to fund additional dividends or share buybacks. Washington notables, including Vice President Mike Pence, are out this week pushing for tax reform, and it could fall into place fairly quickly now.

Recode reports Apple has spend more than $2 million on lobbying the federal government over the past three months. Shareholders could see a return on that political investment shortly.

Qualcomm Dispute: Apple’s relationship with partner Qualcomm, Inc. (NASDAQ:QCOM) has soured, resulting in a bitter series of lawsuits regarding AAPL’s supposed obligations for using QCOM’s technology.

Apple is currently withholding payments and, for the time being, appears to have the upper hand. Qualcomm stock tanked recently on an earnings shortfall driven in large part from Apple’s holding cash back.

There is plenty of risk here for AAPL stock. Qualcomm is trying to block iPhone imports until Apple pays up. However, so far, the iPhone maker appears to be winning in this major stand-off.

Still Relatively Cheap: On a PE basis, AAPL stock isn’t a steal anymore. In previous years, it sold around 10-12x earnings, as investors doubted the sustainability of Apple’s earnings. Those fears are now largely overcome, and the multiple on AAPL stock has improved to a healthier 17.5x.

That’s still quite cheap by market standards, with the S&P 500 Index as a whole trading in the mid-20s. Of the powerful and growing tech companies, Apple is among the cheapest. If analyst forecasts play out, the stock will be back to 14x earnings next year. Throw in the respectable dividend, and Apple is one of the safer havens in the market today.

Verdict on AAPL Stock

I’m still unimpressed with Apple stock. Same for Tim Cook and his management team, for that matter. The supply chain problems are minor by themselves, but speak to Apple’s slipping execution overall.

On a broader scale, the iPhone 8 looks set for a modest launch, particularly if it comes out at such a high price point.

It leaves me wondering where’s the next big consumer electronics product? Sure, iPhones are a fantastic business; they won’t last forever, though. The technology is becoming increasingly commoditized, and Apple will need some new growth driver to keep the stock moving in the right direction.

Otherwise, it’s hard to see why AAPL stock would outperform the S&P 500 by much going forward.

As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/should-you-buy-apple-inc-aapl-stock-3-pros-3-cons-earnings/.

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