Apple (NASDAQ:AAPL) will report earnings on Jan. 28 after market close. Broader indices, as well as many stocks like AAPL, remain near all-time highs. Year-to-date, Apple shares are up about 5.4%.
Yet the new week is already promising to be a volatile one. So today I’ll discuss what investors could expect from the company’s earnings and whether long-term investors should buy into the share prior to the earnings.
What to Look For in Apple’s First-Quarter Earnings
With a market capitalization of over $1.3 trillion, Apple stock will get the market’s full attention when it reports on Tuesday. As always, investors are hoping that it will exceed Wall Street’s average revenue and earnings estimates, mostly thanks to the strong numbers.
Earlier, in 2019, in both Q3 and Q4 reports, the group returned to revenue growth. If there is now an unexpected bump in revenue and the quarter shows a year-over-year decline, then investors would not be pleased.
Because this quarterly report will give numbers for the critically important holiday season, the Street will look at the iPhone sales trends. Since iPhone revenue accounts for over half of Apple’s total revenue, investors pay close attention to iPhone numbers. Apple is expected to debut three 5G compatible phones later in 2020.
Next would be the numbers from Apple Services, a high-margin business compared to products. Services gross margin stands around 64%, as opposed to 31% for products.
Shareholders well realize the importance of the Services segment with its potential to boost overall profitability. Last quarter, it brought in 20% of total revenue. The business includes the App Store, Apple Pay, iTunes, AppleCare and Apple Music. Analysts will also pay attention to metrics regarding Apple’s TV streaming service and its premium headphones, the AirPods Pro, which is part of the wearables.
As China is the tech giant’s second-most important market, any update from China-based revenues as well as projections for 2020 will likely make headlines.
Short-Term Technical Charts Urge Caution
If you are an investor who pays attention to technical charts, too, then please note that it may be time to be cautious. Year-to-date, the stock is up over 105%. In other words, shareholders have more than doubled their investments. On Jan 24, the stock hit an intraday all-time high of $323.33.
Apple’s short-term technical momentum indicators — which describe the speed at which prices move over a given period — are currently in overbought territory. Although these indicators can stay overbought for quite a long time, short-term profit taking in the company’s stock is probably around the corner.
There could easily be a move back to $275 or even $250 level in the near future.
If you are already a shareholder, it may be time to take some profits. Alternatively, you may want to hedge your long stock position with a covered call that expires on Feb. 21. It would offer a degree of downside protection while allowing you to participate in a potential up move. That expiration date would also give you enough time to evaluate the earnings.
Yet Wall Street tends to regard large-market-cap companies as good and stable long-term investments. So with a $1 trillion plus market cap, it would be safe to assume that AAPL stock is unlikely get held down by the market for too long. Thus long-term investors may regard any such dip as opportunity to buy into the shares. I’d expect Apple stock price to reach $350 or even $400 in two to three years.
So Should You Buy Apple Stock Right Now?
The answer depends on many factors, including your risk/return profile and time horizon. The Cupertino tech giant has a strong story and the company has a clean balance sheet, thus it remains a long-term growth play on fundamental basis.
However, there might be stock price weakness in the near-term that potential investors should anticipate. And I’d rather wait to see the various metrics in the next earnings report before buying into the stock.
I believe that much of the potential quarterly good news has already been priced into Apple stock. As it is overbought right now, it may indeed be rather risky own outright prior to the earnings, at least without a hedge in the options markets.
Finally, any management update regarding the dividend or potential share repurchases could easily affect investor sentiment.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
