Apple Inc. (NASDAQ:AAPL) is set to report earnings on Tuesday after the close. As usual, Apple stock is being closely watched by investors, as the $840 billion market cap company is the largest in the U.S. Apple earnings will have a tremendous impact, not only on its direct shareholders, but those invested in equities as a whole, particularly tech stocks.
AAPL is the largest holding in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ), and the sixth largest holding in the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).
With that in mind, what should investors expect from Apple earnings, and what should they do with Apple stock?
Apple Earnings
Aside from the headline numbers, one of the biggest things investors will be focused on is Apple’s capital return. In each of the past two years, management has bumped its buyback by $50 billion. This year, some expectations are calling for $100 billion. Other estimates call for $210 billion over three years.
Will Apple exceed that amount? Will it come up short? It’s hard to say. All we know is that Apple was generating record revenue, profits and cash flow before Washington implemented a more favorable tax plan. Following the lower repatriation tax, Apple management said it planned to bring back its overseas holdings and return a bulk of it to shareholders.
While Apple buys a decent amount of smaller companies as part of its M&A strategy, it avoids larger deals. To date, Apple’s largest deal was buying Beats for just over $3 billion. That tells me that most of Apple’s gigantic cash hoard will continue to go toward buybacks and dividends.
Investors are banking on the company’s massive capital return plan, as many expect somewhat weak iPhone sales for the quarter.
Valuing AAPL Stock
I think David Ingles summed up AAPL stock best. He said:
“Here we have a company with revenue of about $90 billion, gross margins of close to 40 percent and free cash flow of more than $25 billion — in one quarter. There’s a strong case it’s the most successful company in the history of commerce and here we are trying to find a crack at the foot of Everest.”
The company has built a robust ecosystem, with its iPhone being at the epicenter of it all. Not only does the device carry industry-leading margins, it’s the gateway for a number of other Services revenues. It’s a high-margin business growing at a strong rate. Plus, tack-on products — like the Watch, AirPods and Beats — all tie in directly with the iPhone.
This year, analysts expect 14% revenue growth and almost 4% growth in 2019. On the earnings front, estimates call for 24% and 14.5% growth this year and next. For all this, we’re paying just 12.5 times forward earnings. Hardly an expensive valuation given Apple’s high-quality business, robust cash flow generation and capital return plan.
Trading AAPL around Apple Earnings
Despite the trading opportunities that arise due to the volatility in Apple stock, it’s hard for me to be critical of buy-and-hold investors. This group is sitting on hefty gains and (hopefully) little worry. Ingles’ comment really puts Apple’s fundamental picture in perspective. If you had the opportunity to invest in Apple as a private company, it’s hard to imagine saying no — especially with how willing management is to return capital.
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One of the most frustrating things is waiting to buy a stock and watching it skyrocket. Conversely, the next most frustrating thing is buying a stock only to watch it fall. When it comes to earnings, stock trading is simply a gamble.
So if you like the story at Apple, consider buying some now and adding to the position after earnings. That way, you either lower your cost basis on a pullback or already have a position that you can add to on a rally.
When you’re buying a piece of a great company, it could be “dead money” for a month or two. Maybe even a few quarters. But at the end of the day, it’s an investment and you can count on Apple. Looking at the chart, I’m ecstatic if Apple’s at $200 and comfortable if its at $150, because I have a focus on the long term.
Sometimes its easier on your “mental capital” to let the long-term story do the lifting. In Apple’s case, I try to think of it as a long-term private holding, one that I can’t easily trade in and out of. That makes it easier.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AAPL.
