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Buy Apple (AAPL) Stock at New Highs Ahead of Earnings on Services Growth?

Benjamin Rains

Apple AAPL shares have surged over 12% in the last month and hit a new high on Friday ahead of the iPhone giant’s quarterly financial results, which are due out Wednesday, October 30. The question now is should investors consider buying Apple stock before earnings?

Quick Apple Overview

Apple doesn’t need much of an introduction as its innovative products helped kick start the current wave of high-end consumer technology. The company boasts a $1 trillion market cap at the moment, alongside Microsoft MSFT, thanks to its ability to cultivate its brand around the globe through its slick-looking devices and solid advertising.

In fact, Apple is the world’s most valuable brand, according to Forbes, ahead of Google GOOGL, Microsoft, Amazon AMZN, Facebook FB, and Coca-Cola KO.

Apple continues to roll out new iPhones, Macs, iPads, and smartwatches, though many tech aficionados argue that it hasn’t introduced anything game-changing in years. Nonetheless, AAPL stock has climbed as consumers seem happy enough to buy the latest devices that feature a small number of upgrades.

However, iPhone revenues have slipped recently and the firm has taken a hit in China amid the ongoing trade war, as consumers in the world’s second largest economy opt for less expensive smartphones. Luckily, CEO Tim Cook has focused for years on Apple’s non-hardware business.

Apple’s services unit features the likes of its app store and Spotify SPOT challenger Apple Music. More recently, Apple has introduced an Apple credit card, with the help of Mastercard MA and Goldman Sachs Group GS, and a new Apple Arcade video game service. On top of that, Wall Street, investors, and Netflix NFLX executives are anxious to see what its soon-to-be-launched streaming TV service looks like.





Other Fundamentals

As we mentioned at the top, AAPL stock is up big recently and has now climbed over 55% in 2019 to easily outpace Facebook’s 43% comeback and the S&P 500’s 17% climb. Plus, Apple has now easily surpassed its pre-2018 selloff highs and hit $246.73 per share on Friday.

Apple’s strong run has stretched its valuation picture slightly. Apple is currently trading at 18.5X forward 12-month Zacks Consensus Estimates. This marks a premium compared to its two-year median of 15.4X but is still below its 19.7X high over this stretch.

Apple also currently pays an annualized dividend of $3.08 per share, up roughly 6% from last year and 22% on a two-year stack. AAPL, which is the only one of the so-called FAANG stocks that pays a dividend, currently has a yield of 1.26%. Plus, Apple continues to buy back shares with its billions of dollars of cash on hand.





Q4 Outlook & Beyond

Looking ahead, Apple’s Q4 2019 sales are projected to slip 0.34% from the year-ago period to $62.69 billion, based on our current Zacks Consensus Estimates. This projected decline doesn’t look that bad when investors consider that Apple’s sales surged 20% in Q4 2018 and dipped 5% in the second quarter of 2019 and 4.5% in Q1.

Plus, Apple’s Q1 fiscal 2020, which will include the vital holiday shopping period, revenue is expected to jump 2.22%, with full-year FY20 projected to pop 4.3% above our 2019 estimate.

Meanwhile, Apple’s adjusted Q4 EPS figure is projected to slip 2.4%, with full-year earnings expected to fall 1.85%. Peeking ahead, Apple’s Q1 2020 earnings are then projected to pop 8.4%, while full-year fiscal 2020 is expected surge roughly 12% above our current-year estimate.

iPhone

Along with Apple’s top and bottom lines, Wall Street will be closing watching two business units: iPhone and services. To help investors understand what to expect from both key divisions, will use our Key Company Metrics.

Fourth-quarter iPhone sales are projected to slip around 13% to $32.196 billion. This would roughly match last quarter’s 12% drop and mark an improvement from Q2’s 17% decline in smartphone sales. Like its overall Q4 sales estimates, Apple’s quarterly iPhone revenue is going up against a year-ago period where iPhone sales skyrocketed 29%.





Services

Lastly, Apple’s services revenue is expected to hit $12.300 billion, for a climb of 23% from Q4 2018’s $9.98 billion. Investors should be pleased to note that this would easily top the year-ago quarter’s 17% services expansion and crush last quarter’s 13% growth.

Bottom Line

Apple stock popped over 1.2% Friday amid some positive earnings results, including chip giant Intel’s INTC recently raised guidance. Reports also surfaced Friday that said the U.S. and China are closer to finalizing portions of a “phase one” trade deal. Plus, Apple’s CEO has remained in contact with President Trump to help try to make sure its key products remain tariff-free.

AAPL is currently a Zacks Rank #3 (Hold) that rests at new highs heading into its earnings release after the closing bell on October 30. This could make it harder for Apple to surge higher unless it provides impressive guidance or wows Wall Street when it releases its streaming TV service on November 1, just ahead of Disney DIS.

It is inherently risky to try to play stocks around earnings. However, Apple stock remains a strong long-term buy and hold candidate.

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Click to get this free report The Walt Disney Company (DIS) : Free Stock Analysis Report Netflix, Inc. (NFLX) : Free Stock Analysis Report Amazon.com, Inc. (AMZN) : Free Stock Analysis Report Facebook, Inc. (FB) : Free Stock Analysis Report Alphabet Inc. (GOOGL) : Free Stock Analysis Report Coca-Cola Company (The) (KO) : Free Stock Analysis Report Apple Inc. (AAPL) : Free Stock Analysis Report Microsoft Corporation (MSFT) : Free Stock Analysis Report The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report Intel Corporation (INTC) : Free Stock Analysis Report Mastercard Incorporated (MA) : Free Stock Analysis Report Spotify Technology SA (SPOT) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research