As the U.S. markets slowly recover from their woes over the past few months, Apple (NASDAQ:APPL) stock remains one of the most followed. Over the last few months, a lot of bad news has fallen on AAPL. As a result, since becoming the first U.S. company with a market cap of over $1 trillion in early August, Apple stock has fallen from an all-time high of $233.47 on Oct. 3, 2018 to $142 on Jan. 3, 2019.
Investors’ shift in mood since the end of summer 2018 did not affect Apple stock alone, as technology stocks in general have been under pressure thanks to overall fear and uncertainty that has been bearing down on the market. But many investors are specifically wondering what to expect from Apple’s upcoming earnings report, and they’re also asking themselves “is Apple stock a buy ahead of earnings?”
AAPL will report earnings on Jan. 29, after the close. So what kind of price performance can we expect from the company around its earnings release? While the AAPL stock price has shown signs of finding a bottom in January, I am getting cautiously optimistic toward AAPL shares.
Here are the reasons for my optimism:
Apple Stock Pros
Potential Trade War “Truce”: Over the past few weeks, we have witnessed a relief rally, both in the broader equity markets and in Apple stock following reports of a possible trade wars “truce” between the U.S and China. Almost 20% of Apple’s revenues come from sales within China, thus the trade war discourse of 2018 has affected the AAPL stock price negatively. In case of an actual trade deal between the two countries, the market’s risk appetite is likely to increase and Apple shares could jump to higher levels fast.
Potential Halt in Federal Reserve Rate Hikes: Recently, various Federal Reserve officials have discussed economic scenarios for a pause in its proposed interest-rate hiking decision for 2019. In 2018, the AAPL stock price suffered from rising rates, as increased rates strengthened the U.S. dollar and hurt AAPL’s bottom line.
The company’s SEC filing clearly identifies the negative impact of foreign currency fluctuations as well as tariffs on AAPL earnings. Almost half of Apple’s sales come from Pacific Rim countries as well as Europe, the Middle East and Africa. The weakening of foreign currencies has translated into lower earnings for Apple; therefore, a pause in rate hikes would help Apple stock find a longer-term bottom.
Potential Revenue Increase in Services: Apple’s reach to a trillion dollars several months ago was partly paved with iPhones and iPads, as well as Macs. It was also assisted by a record number of stock buybacks from the company. But those shareholders who remain committed to AAPL stock realize the importance of its highly profitable division, i.e., Apple Services, which includes the App Store, Apple Pay, iTunes, AppleCare and Apple Music, for the current and future bottom line.
These services help consumers get more benefit and enjoyment from their Apple products. AAPL’s revenue from Services division has grown over 50% in two years, making it the second-largest division behind the iPhone division. Apple has been working hard to increase subscribers to its various services. For example, Apple recently announced a partnership deal in the U.S. with Verizon (NYSE:VZ), the largest wireless provider in the country, whereby subscribers to Verizon’s several premium cellular plans will also have a complementary Apple Music subscription.
As the margins have decreased on its products, AAPL shareholders would now like to see more data (i.e., transparency) released on Apple Services, along with a larger percentage of consolidated gross profit coming from Services. Driving more revenue and profit from Services will provide the next impetus for growth and the related increase in Apple stock price.
What Could Derail AAPL Stock in the Short-term?
When Apple reports earnings on Jan. 29, investors will pay extremely close attention to the details in the company’s quarterly results. Any disappointment in Apple’s earnings statement or future outlook could easily send AAPL stock back below $150 to test its previous lows. Therefore, there might be weakness in the AAPL stock price in the near-term that potential investors should anticipate.
However, it’s important to remember that a mega company with fundamentals and brands as strong as Apple’s could withstand several months of uncertainty. And, eventually, management would make the proper decisions to move the company forward. Therefore, patient investors who continue to believe in the AAPL story may see any price dip below the $150 level as an opportunity to go long AAPL stock and ride out the daily volatility. In two to three years, I expect these investors to be rewarded handsomely.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.