Can Apple’s earnings turn its fortunes around? – Stock Market News
January 28, 2019 2:26 pm
Apple will release its fiscal first-quarter earnings on Tuesday, after the US market close. Since the firm has already provided estimates on revenues lately, traders will focus mainly on the management’s guidance for the next quarter. It’s striking that after being the market’s darling for several years, recent weakness in sales has turned Apple into an underperformer with a relatively attractive valuation.
The California-based tech behemoth rattled markets in early January, when it issued preliminary estimates for its upcoming quarterly results, sending its stock into a tailspin. Specifically, the iPhone-maker announced that its revenues would probably come in at $84bn, materially lower than even the lower end of the guidance it provided previously, which was for sales of $89-93bn during the holiday quarter. Such a number would also represent a decline on a year-over-year basis for revenues. CEO Tim Cook pointed the finger at China, indicating that: “lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance”.
Cook highlighted the bright spots too though, indicating they still expect to report new all-time records for earnings per share (EPS), which according to Thomson Reuters consensus estimates are expected to clock in at $4.17. If earnings meet expectations, that would mark an increase of 7.2% from the same quarter a year earlier. Admittedly though, most of the strength in EPS will likely be a result of the company’s aggressive stock buyback program, which decreases the total number of available shares for the public and thereby, artificially boosts this highly-watched ratio.
Since Apple has already guided expectations on these numbers, the scope for major surprises is likely limited. Thus, investors will probably focus more on the guidance by management for the next quarter. The burning question will likely relate to total sales, and whether the top executives see yet another quarter of declining year-on-year revenue. Any comments on the iPhone could attract special attention, because even though other segments of the firm are growing rapidly, the iconic smartphone still accounts for over 50% of Apple’s total revenues. Beyond that, Apple’s sales and net margin on its services business will be watched; this is the section that encompasses the App Store and iTunes. The “other products” category, which includes the Apple Watch and Airpods, will also be eyed.
In valuation terms, Apple looks much more attractive than it did a few months ago. Let’s look at a simple metric, the 12-month forward price-to-earnings (P/E) ratio. This ratio signifies the dollar amount someone would need to invest to receive back a single dollar in annual earnings. Hence, the higher it is, the more expensive a stock is thought to be, and vice versa. Apple currently trades at only 12.7 times forward earnings, which seems relatively ‘cheap’ considering that the average for the S&P 500 technology sector is 16.5. For comparison, the average for the whole S&P 500 index is 15.6. Before concluding that Apple is indeed undervalued though, bear in mind that such a low P/E ratio likely denotes market concerns that its revenue growth could continue weakening going forward, so in that sense, it may be reasonable.
Turning to the market reaction, upbeat guidance by management could see the bulls retake control, pushing Apple’s stock above the $158 hurdle. Such a break could open the way for the $163 zone, marked by the swing low on December 10, with even steeper advances aiming for the November lows at $170.
On the flipside, if the executives sound a note of caution about the future, the stock could resume its broader downtrend. Support to declines may be found near the January 14 low of $149.2, before the 1½-year low of $141.7 comes into view. Even lower, the $134.5 zone would attract attention, defined by the peaks of April 2015.
Year-to-date and ahead of Monday’s market open, Apple’s stock is flat at 0%. Meanwhile, the S&P 500 (+6.3%), Dow Jones (+6%) and Nasdaq 100 (+7.2%) are all notably higher. Apple is a constituent stock in all three of these indices. It’s striking that after being the driving force behind market gains in recent years, Apple is now lagging the broader market by a sizeable margin.
Beyond its own stock, Apple’s earnings could also impact the aforementioned indices, or at least the broader tech sector. Remember that although having lost some of its glamour, the company still has a heavy weighting in most of these indices, given its gigantic market capitalization.
Apple will release its fiscal first-quarter earnings on Tuesday, after the US market close. Since the firm has already provided estimates on revenues lately, traders will focus mainly on the management’s guidance for the next quarter. It’s striking that after being the market’s darling for several years, recent weakness in sales has turned Apple into an underperformer with a relatively attractive valuation.
The California-based tech behemoth rattled markets in early January, when it issued preliminary estimates for its upcoming quarterly results, sending its stock into a tailspin. Specifically, the iPhone-maker announced that its revenues would probably come in at $84bn, materially lower than even the lower end of the guidance it provided previously, which was for sales of $89-93bn during the holiday quarter. Such a number would also represent a decline on a year-over-year basis for revenues. CEO Tim Cook pointed the finger at China, indicating that: “lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance”.
Cook highlighted the bright spots too though, indicating they still expect to report new all-time records for earnings per share (EPS), which according to Thomson Reuters consensus estimates are expected to clock in at $4.17. If earnings meet expectations, that would mark an increase of 7.2% from the same quarter a year earlier. Admittedly though, most of the strength in EPS will likely be a result of the company’s aggressive stock buyback program, which decreases the total number of available shares for the public and thereby, artificially boosts this highly-watched ratio.
Since Apple has already guided expectations on these numbers, the scope for major surprises is likely limited. Thus, investors will probably focus more on the guidance by management for the next quarter. The burning question will likely relate to total sales, and whether the top executives see yet another quarter of declining year-on-year revenue. Any comments on the iPhone could attract special attention, because even though other segments of the firm are growing rapidly, the iconic smartphone still accounts for over 50% of Apple’s total revenues. Beyond that, Apple’s sales and net margin on its services business will be watched; this is the section that encompasses the App Store and iTunes. The “other products” category, which includes the Apple Watch and Airpods, will also be eyed.
In valuation terms, Apple looks much more attractive than it did a few months ago. Let’s look at a simple metric, the 12-month forward price-to-earnings (P/E) ratio. This ratio signifies the dollar amount someone would need to invest to receive back a single dollar in annual earnings. Hence, the higher it is, the more expensive a stock is thought to be, and vice versa. Apple currently trades at only 12.7 times forward earnings, which seems relatively ‘cheap’ considering that the average for the S&P 500 technology sector is 16.5. For comparison, the average for the whole S&P 500 index is 15.6. Before concluding that Apple is indeed undervalued though, bear in mind that such a low P/E ratio likely denotes market concerns that its revenue growth could continue weakening going forward, so in that sense, it may be reasonable.
Turning to the market reaction, upbeat guidance by management could see the bulls retake control, pushing Apple’s stock above the $158 hurdle. Such a break could open the way for the $163 zone, marked by the swing low on December 10, with even steeper advances aiming for the November lows at $170.
On the flipside, if the executives sound a note of caution about the future, the stock could resume its broader downtrend. Support to declines may be found near the January 14 low of $149.2, before the 1½-year low of $141.7 comes into view. Even lower, the $134.5 zone would attract attention, defined by the peaks of April 2015.
Year-to-date and ahead of Monday’s market open, Apple’s stock is flat at 0%. Meanwhile, the S&P 500 (+6.3%), Dow Jones (+6%) and Nasdaq 100 (+7.2%) are all notably higher. Apple is a constituent stock in all three of these indices. It’s striking that after being the driving force behind market gains in recent years, Apple is now lagging the broader market by a sizeable margin.
Beyond its own stock, Apple’s earnings could also impact the aforementioned indices, or at least the broader tech sector. Remember that although having lost some of its glamour, the company still has a heavy weighting in most of these indices, given its gigantic market capitalization.
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