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Buy Apple (AAPL) Stock Before Earnings on Services & China Growth?

Benjamin Rains

As Q2 earnings season heats up, all of Wall Street will be watching Apple AAPL closely to see how the technology powerhouse performs amid slowing iPhone sales and persistent U.S.-China trade war worries. Let’s dive into Apple’s Q3 fiscal 2019 outlook and some other fundaments to see if investors should consider buying AAPL stock heading into the company’s earnings release Tuesday.

Overall Q2 Breakdown

A total of 138 S&P 500 members had reported their quarterly results as of Wednesday, with earnings up 2.8% on 3.4% higher revenue. Despite the overall growth, some firms pointed to ongoing trade issues as a reason for lowered guidance. Plus, total earnings for the semiconductor industry, which accounts for almost a sixth of the Tech sector’s total earnings, are expected to be down -34.0%. This projected downturn includes giants like Micron MU and Nvidia NVDA.  

Meanwhile, all of the so-called FAANG stocks, aside from Apple, have now reported their quarterly financial results. Facebook FB on Wednesday impressed, despite government intervention worries, with top and bottom-line beats on the back of counited user expansion.

Netflix NFLX wasn’t as lucky after the streaming TV firm fell way short of its own subscriber figures. Amazon AMZN missed bottom-line estimates after the closing bell Thursday. And shares of Google parent Alphabet GOOGL popped following better-than-projected results and a massive buyback announcement.

 

 

 

 

Recent Apple News & Overview

Not to be outshined by its peers, Apple made headlines Thursday afternoon when it announced, in a joint statement, its $1 billion purchase of a “majority” of Intel’s INTC smartphone modem business that includes 2,200 Intel employees. The transaction is projected to close in Q4 2019 and is, of course, subject to regulatory approval. “They, together with our significant acquisition of innovative IP, will help expedite our development on future products and allow Apple to further differentiate moving forward,” Apple’s senior VP of Hardware Technologies, Johny Srouji, said in a statement.

Apple had previously spent much of the first half of the year trying to convince consumers that it takes privacy very seriously amid growing concerns about user data. Tim Cook’s company has also pushed deeper into its services business as it tries to become less reliant on iPhone sales.

The historic tech titan’s services unit is set to feature a new credit card, a subscription-based gaming offering, and more. On top of that, Apple is ready to debut Apple TV+ in the fall. Apple’s streaming TV service could have a similar impact to the app store-heavy division as its Spotify SPOT challenger Apple Music has recently.

Q3 Outlook

Apple posted better-than-projected earnings and revenue results later quarter. Nonetheless, AAPL’s adjusted Q2 EPS figure dipped 10% on the back of a 5.1% revenue decline—worse than Q1’s 4.5% revenue downturn.

Moving on, our current Zacks Conesus Estimates call for Apple’s quarterly revenue to come in roughly flat (+0.09%) from the year-ago period at $53.31 billion. AAPL’s iPhone revenue, which is projected to account for 50% of total sales, is projected to dip roughly 13% from $29.91 billion in the year-ago period to $26.073 billion, based on our Key Company Metrics. This might not sound great, but it would represent the smallest downturn in fiscal 2019 for Apple’s flagship product. Q2 iPhone sales dropped over 17% and Q1 revenue dipped 14.9%.

Furthermore, Apple’s revenues in Greater China are actually expected to climb roughly 1.5% from $9.55 billion in Q3 2018 to reach $9.71 billion. This would mark stellar improvement from last quarter when sales in the region that also includes Hong Kong and Taiwan tumbled 21.5%. Greater China is projected to account for roughly 18% of Apple’s total third quarter revenue.

Apple’s services unit is projected to jump from $9.55 billion in the prior-year quarter to $11.70 billion in Q3. This would mark a 22.5% climb from the year-ago period and account for 22% of Apple’s expected Q3 revenue. Plus, the key growth unit only climbed 16% last quarter.  

At the bottom end of the income statement, Apple’s adjusted Q3 earnings are projected to fall 10.3% to $2.10 a share. It is also worth noting that Apple almost always beats our quarterly earnings estimates.

 

 

 

Bottom Line

Apple is currently a Zacks Rank #3 (Hold) that sports “B” grades for Value and Growth in our Style Scores system. We can see that Apple is currently trading at a discount compared to the S&P 500 as it has for most of the last five years. The company is also a dividend payer with a 1.48% yield at the moment.

AAPL stock closed regular trading Thursday at $207.02 a share, down roughly 11% from its 52-week intraday high of $233.47. Apple shares are now up 31% in 2019. This means a pullback could be due no matter what happens following earnings. Yet, Apple’s outlook had been so dismal that its projected services strength, coupled with some signs of life from its iPhone segment and a possible return to growth in China could boost AAPL stock.

Apple is scheduled to release its Q3 fiscal 2019 earnings results after the closing bell on Tuesday, July 30. So, make sure to come back to Zacks for a complete breakdown of the iPhone firm’s actual metrics.

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