Apple (NASDAQ:AAPL) stock has been on a roll, with shares up 46% year-to-date. The stock hit its all-time high on Oct. 29, reaching $249.75 per share. But with earnings coming out later today, is now the time to buy Apple?
High expectations are baked into the Apple stock price. As CEO Tim Cook discussed on last quarter’s earnings call, the company is banking on wearables and services to move the needle. This comes as the company sets to improve sagging iPhone sales. Last quarter, iPhone sales were down 12% from the prior year’s quarter. With iPhone 11’s launch on Sept. 20, results may have improved. Today’s earnings could be make-or-break for Apple’s performance going into 2020.
But at the current share price, AAPL may not be a strong opportunity. Let’s take a closer look and see why Apple may be a better buy on a pullback.
How Today’s Earnings Release Could Impact Apple Stock
Analyst consensus is projecting $62.6 billion in revenue for the quarter ending Sept. 30. Earnings per share is expected to be $2.84 per share. What are investors looking for with Apple stock?
As I mentioned above, the launch of iPhone 11 at the tail end of the quarter may help improve sagging sales for the popular smartphone. Although AAPL is pivoting its growth focus to services and wearables, investors are keyed in on iPhone sales to assess the company’s future prospects.
Foot traffic analysis may offer insight. Jefferies’ Kyle McNealy said that stores saw a 37% increase in traffic on the iPhone 11’s launch day. Compare this to the iPhone XS launch, where traffic was up 32% on launch day. McNealy believes iPhone 11 sales will exceed Wall Street expectations.
Another catalyst in the pipeline is the launch of a 5G iPhone. Apple is expected to bring 5G support to its iPhones in 2020. The company has started to mobilize suppliers in preparation for the launch.
Services are also top of mind for this quarter’s earnings. This quarter will not be as exciting as next quarter, with the launch of Apple TV+ streaming service on Nov. 1. But guidance could provide insight. Cannacord Genuity’s Michael Walkley estimates the company’s services revenue could double 2016 levels by 2020. This means services, driven by Apple TV+ and other new launches, hold the key for the future of Apple stock.
Expectations for wearables growth remain high. Analyst consensus calls for the Wearables, Home & Accessory segment to see 41% sales growth for the quarter.
But with the recent rally, does the Apple stock price already account for this? Let’s take a closer look at valuation.
AAPL Stock Is ‘Cheapest of the FAANGs’
Despite the recent rally, Apple stock remains cheap compared to its FAANG peers. The FAANG acronym includes Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Google parent Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Netflix (NASDAQ:NFLX).
Apple stock trades at a forward price-to-earnings ratio of 20.8. The company’s enterprise value/EBITDA ratio is 14.5. Here are the valuation metrics for the other FAANG components:
- Alphabet: Forward P/E of 27.1, EV/EBITDA of 17.1
- Amazon: Forward P/E of 85.8, EV/EBITDA of 26.5
- Facebook: Forward P/E of 30.9, EV/EBITDA of 18.7
- Netflix: Forward P/E of 83.3, EV/EBITDA of 53.8
Not only is AAPL stock cheaper than its FAANG peers, it’s cheaper than Microsoft (NASDAQ:MSFT). Microsoft trades at 26.6 times forward earnings, and has an EV/EBITDA ratio of 18.1.
But the current discount for AAPL stock may be justified. Apple is no longer a highflier. Sales for the trailing twelve months were $259 billion, down from $265.6 billion in 2018. Unless new catalysts pay off, the company will have a tough time getting back on the growth train.
Analysts expect revenues to climb from $259.3 billion for year ending Sept. 30 to $271.2 billion in FY2020. But this means a mere 4.6% in sales growth. Apple is the closest to blue-chip status of the FAANG names. Even Microsoft, with estimated growth above 10% between FY2020 and FY2021, looks like a highflier by comparison.
With this in mind, the Apple stock price may have a tough time climbing higher. Perhaps shares could find some love with a juiced-up dividend. The current yield is 1.3%. But the Street is not looking for Apple to become a “widows-and-orphans” stock. The company needs another game changer to see material appreciation.
Wait After Earnings to Make a Move
The Apple stock price has seen nice action throughout 2019. But ahead of today’s earnings, now is not the time to dip your toe in the water. While the stock is cheap compared to its FAANG peers, growth projections justify this discount.
Even at a lower valuation, AAPL stock may be priced for perfection. High expectations for the iPhone 11, along with the upcoming launch of Apple TV+, could turn to a selloff if today’s guidance doesn’t match prior projections.
On a pullback, Apple stock may be a screaming buy. But for now, wait for a better entry point.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
