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Is Falling iPhones Demand an Entry Point to Apple ETFs?

Sanghamitra Saha

Apple Inc. AAPL shares were down about 7% in 2018 mainly on concerns of falling demand for iPhones. While many hoped for a rebound in the New Year, the company disappointed investors having cut its revenue guidance for the holiday quarter.

The technology giant trimmed its fiscal first-quarter revenue guidance to $84 billion from $89-$93 billion. This is also much below the then Zacks Consensus Estimate of $91.26 billion (read: Apple Tanks, Lowers Q4 Revenue Outlook: Tech ETFs in Focus).

Notably, Apple reduced its quarterly revenue forecast for the first time in more than 15 years, hurt by slowing sales in China due to ongoing trade tensions as well as economic slowdown and fewer iPhone upgrades.

If this was not enough, the Nikkei Asian Review reported on Jan 9 that Apple is planning fewer-than-planned production for its three new iPhone models by about 10% for the March quarter. Overall planned production volume of both old and new iPhones is expected to be lowered to about 40 million to 43 million units for the first quarter of 2019, from an earlier projection of 47 million to 48 million units, Nikkei reported.

Needless to say, all these woes hurt Apple shares even in the New Year as the stock is down 4.4% (as of Jan 8, 2019) versus 3.9% gains in the Nasdaq composite. Now the question is whether the pain in Apple will last for the year or the stock will soon stage a rebound. Let’s a delve a little deeper.

Gradual Shift to Services & Wearables

Apple’s Services businesses — including revenues from Internet Services, App store, Apple Music, AppleCare, Apple Pay, and licensing and other services — have been coming out as the company’s new cash flow generators. In 2017, Cook announced the plans to double Apple’s service revenues in three years.

Apple has seen paid subscriptions surpassing $330 million in Q4 of fiscal 2018, reflecting an increase of more than 50% year over year. The CEO said that the company will add new services, especially in the area of health care, in 2019.

Apple has some groundbreaking offerings when it comes to Apple Watch and Apple TV. Cook indicated that Apple Watch and the AirPods have each generated between four and six times more in revenues than the iPod had generated in the same amount of time since its launch, per CNBC. In 2018, Apple has seen its revenues from services and other products increasing about 27% year over year versus an uptick of 18% seen in iPhones.

Upbeat Industry Rank & Moderate Valuation

Apple belongs to a top-ranked Zacks industry (top 42%) and Zacks sector (top 25%). Apple’s valuation is almost on par with the industry, with the forward P/E ratio at 12.6x versus 11.9x. However, its revenue and earnings growth projection for fiscal 2019 trail that of the industry.

Lucrative Entry Point to Apple ETFs?

If you think Apple would turn around on the basis of its shifting fundamentals, ETFswith considerable exposure to Apple can be winnings options. Fund-centric options are better bets than a single stock because the basket approach often eradicates stock-specific risks.

These funds include iShares U.S. Technology ETF IYW, Select Sector SPDR Technology ETF XLK and Vanguard Information Technology ETF VGT (see all Technology ETFs here).

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