Apple (NASDAQ:AAPL), which has always been a favorite name of many investors, has declined by about 25% from its recent high of $327.85. However, I believe that it’s still too early to consider buying Apple stock.
Despite my reservations about Apple, investors should keep the name on their radar. The company has a tremendous amount of cash, giving it the opportunity to grow and diversify through acquisitions. Meanwhile, the company’s “Wearables, Home and Accessories” segment has been delivering robust growth., and Apple is developing an autonomous car business which can be another game changer.
Apple is an excellent stock. But the company is facing near-term problems. As a result, investors will probably have the opportunity to buy Apple stock at lower levels in the coming months.
Near-Term Issues
Apple stated that its fiscal second-quarter revenue would come in below its initial guidance. The company blamed the guidance miss on iPhone supply constraints and weak demand in China.
My concern is that the rest of the world is in a similar situation as China was at the beginning of the year. The coronavirus from China has spread through the U.S. and Europe. Another big country, India, is in lockdown mode.
In February 2020, Apple mentioned that “outside of China, customer demand across our product and service categories has been strong to date.” That will change, and demand for the company’s products is likely to be weak for the next few quarters globally. President Donald Trump has already warned that the impact of the virus can last until Q3.
The effects of the coronavirus pandemic will also be seen in the form of rising unemployment and declining consumer confidence. That will impact the demand for Apple’s products, and its earnings guidance may be revised sharply lower.
Its outlook is therefore too uncertain to estimate. Significantly worse than expected results from Apple will likely take the stock lower.
As a result, investors should be cautious about Apple stock for the foreseeable future.
Looking Beyond the Coronavirus Pandemic
As the coronavirus spreads globally, Apple has stated that it will donate $15 million to fighting the outbreak. Governments, central banks and companies are all focused on limiting the humanitarian crisis. With the world combating the virus, it is likely to be contained in coming quarters, and investors’ focus will again shift to economic growth.
Morgan Stanley analyst Katy Huberty lowered her estimate for Apple’s full-year revenue estimate by 4.5%, but she increased her FY2021 estimates by 3.0%, citing “pent-up demand for the company’s products.”
I think Apple will indeed probably benefit from strong demand in FY21, since demand for its 5G phones will likely be powerful. Apple is expected to launch 5G phones later this year or in FY21.
Further, in its last reported quarter, the revenue of Apple’s wearable segment jumped 37% year-over-year to $10 billion. With an annualized revenue target of $40.0 billion, the wearables segment is another cash flow machine for the company. Products like augmented reality headsets may ensure that the segment’s strong growth will continue.
The Bottom Line on Apple Stock
Products and services other than the iPhone will meaningfully contribute to Apple’s growth. The company will be more diversified in the coming years, and that should help it generate sustained earnings growth.
However, the company’s results are likely to be weak in coming quarters and as its earnings disappoint investors, the stock will trend lower.
Once the coronavirus headwind eases, Apple’s growth catalysts will be 5G phones and the continued growth of its wearable business.
Investors should keep their yeys on Apple stock, and the coming quarters can be a good time to buy the shares.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
