The most followed stock on the planet is all over the news today after its latest earnings announcement.
The question: Is Apple’s (AAPL) 5% dip the start of something worse, or an overreaction that investors should buy?
The answer: It’s an overreaction — one made by investors who are used to seeing bigger beats from the company. Earnings of $1.85 a share were 4 cents better than expected, and revenue of $49.6 billion bested expectations of $49.3 billion. Still, those results beat by the smallest percentage in two years, so some investors got spooked.
The main reason for today’s weakness was iPhone sales. Apple sold 47.5 million units in the quarter, which is a 35% increase year-over-year but short of Wall Street’s expectations of nearly 48 million units. The whisper number was actually closer to 50 million units.
But I don’t view this as a bad result.
First, it’s very clear that Apple is gaining market share in the high-end phone segment on a worldwide basis — Chinese iPhone sales were up a spectacular 87%, and management remains bullish on continued growth there. Second, considering the company is now in the latter half of its iPhone 6 sales cycle (it was released to the public in September 2014), 35% sales growth remains very impressive. Plus, the company’s margins were boosted by the fact that demand for the phone remained high with an average sale price of $660, which was better than expected.
Apple has become a bit notorious for sandbagging its future guidance, and once again management provided numbers that were below expectations. For the current fiscal fourth quarter, revenue guidance came in at $49 billion to $51 billion while analysts on the Street had been expecting $51.06 billion.
After results came out last night, shares fell sharply in after-hours trading, marking the worst post-earnings earnings reaction for AAPL since its January 2014 release. At its worst, the decline had effectively wiped out $62 billion of Apple’s closing market capitalization.
I incorporate both fundamentals and technicals in my analysis, so let me tell you why I view this as a buying opportunity from each perspective.
On a technical basis, Apple stock has managed to hold above $120, which has been a strong support level for the last few years, as has the 200-day simple moving average. It’s important that AAPL holds that level for the next few days. As long as support continues to hold, I expect shares to bounce back again in time.
And from a fundamental perspective, AAPL currently trades with a price-to-earnings ratio below that of the overall market, and is expected to grow earnings at a faster pace than the S&P 500. The numbers prove that Apple is a better value play than the S&P 500 or the Nasdaq.
Apple continues to have plenty of future growth opportunities. Just looking at the iPhone 6, only 27% of people that owned iPhones prior to the 6’s launch have upgraded to the newer model. With loyalty rates above 86%, there are a lot of people left to upgrade their phones in the near future, which would be great for sales.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin.
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