Apple’s Earnings Weren’t That Bad

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Apple (NASDAQ:AAPL) was a victim of great expectations. Or at least it seems that way following the company’s earnings report last Thursday afternoon. AAPL stock is down nearly 10% and near five-week lows after releasing its fiscal Q4 results that were fine but not too thrilling.

Apple (AAPL) stock information in a magnifying glass.

Source: dennizn / Shutterstock.com

So should investors worry? Not so fast. In fact, there’s very little in the Q4 report that really moves the needle for AAPL stock either way. Apple may face short-term headwinds, as other big tech companies have also sold off on their earnings reports. In any case, here’s what traders need to know about Apple for the rest of 2020.

The Q4 Earnings Were Not Great But Not Bad

Apple’s earnings can be summed up in a single word: lukewarm. There was nothing wrong with them explicitly, as both its top and bottom line topped analysts’ average expectations.

That said, Apple’s  iPhone sales came up significantly short of what the Street was looking for. Further, the giant’s China revenues also missed the mark, and Apple didn’t offer guidance for its current quarter.

The latter development makes sense in the context of the new wave of the novel coronavirus, but it’s still disappointing for investors.

On the other hand, several of the company’s offerings, including its Services, generated higher-than-expected revenue. Services, after all, is very important for AAPL stock as traders love recurring revenues.

Apple’s Services revenue for the quarter of $14.5 billion topped the average estimate by a robust $380 million. That is the long-term driver of Apple’s growth, and right now, it’s humming.

Valuation Remains the Sticking Point

If AAPL stock was trading at, let’s say, 20 times its earnings, it would probably have climbed in the wake of its Q4 results. The company’s  revenue and earnings increased modestly during the economic storm. That’s impressive.

And Apple remains a fortress. As of the end of last quarter, it reported that it had almost $200 billion of cash. That’s simply an unfathomable sum. Make no mistake; AAPL stock remains a safe-haven holding.

However, at this elevated stock price, Apple needs to be than just a safe haven to justify owning its shares. Coming into this report, analysts, on average, expected Apple’s 2021 EPS to be  $3.87.

That’s a forward P/E ratio of about 30 for a company whose annual revenue growth is 1%. And analysts may trim their forward expectations a bit on this news as well, pushing up the forward P/E ratio a bit.

Assuming that interest rates remain low indefinitely and that investors will be eager to pay high prices for blue-chip stocks, AAPL stock may be worth owning from a mathematical perspective.

It’s a logical argument and could be correct. However, historically, paying 30 times earnings for a company with barely any revenue growth hasn’t worked out well.

Apple arguably will be able to show better results once the pandemic is over. Its sales in China in particular should bounce. However, the pandemic offered tailwinds for some parts of Apple’s business, and the $1,200 stimulus checks given out by Washington certainly helped as well. Yet Apple can’t grow that much because it’s simply too big to do so.

The Verdict on AAPL Stock

I’ve been skeptical of Apple’s valuation in recent months. It’s simply hard to get meaningful gains out of a mega-capitalization stock once it has already surged so much. It’s one thing for the shares of  a small software company growing at 40% per year to jump exponentially. It’s another thing entirely for the shares of the world’s largest company to do the same.

Apple grew its revenues just 1% this quarter versus the same quarter last year. That’s not bad, considering the world was in the midst of a pandemic last quarter.

But AAPL stock is up 47% in 2020, even though its business has not grown meaningfully. It’s hard to justify that gain. If Apple is a sort of tech utility firm, it’s reasonable for its shares to advance 10%-20% in a year, but 50% is a bit much.

To the company’s credit, Apple didn’t do anything particularly wrong last quarter. In fact, several of its businesses did very well.

So don’t blame the stock’s post- earnings retreat on the company.  A highly-valued company like Apple will have these sorts of hiccups when its earnings are roughly in-line with the average estimates, as these were. Over the long-haul, Apple’s Q4 results won’t impact the stock much.

If you liked Apple prior to this report, there’s no reason to sell it now. That said, the shares are still trading at a premium valuation; AAPL stock remains a safe blue chip, but there are cheaper options elsewhere in the tech space right now.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

 


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