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Going Into Earnings, Do Not Bite Into More Apple Stock

Will Healy

It seems Apple (NASDAQ:AAPL) stock found its footing faster than I had predicted. After forecasting that it would stagnate, Apple stock has since risen by more than 15% since I made that call in late August.

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However, many of the points that I made in August remain concerns. As Apple prepares to report earnings for its fourth quarter, Apple stock should continue to deliver for long-term holders. However, near-term, I see little if any upside in AAPL stock.

Expect Lower Earnings, Revenue

Apple will report earnings for its previous quarter on Oct. 30 after the market close.  The consensus estimate of $2.83 per share falls short of the $2.91 the company earned in the same quarter last year. Analysts also forecast a decline in revenue to $62.88 billion. This would only represent a modest decline from the year-ago level of $62.9 billion.

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Apple usually exceeds earnings estimates. I do not think that trend will break in this quarter. However, I believe guidance will determine how Apple stock reacts to the news. Given the fundamentals and market conditions, it will probably have to impress Wall Street to prevent a drop in AAPL.

Beware the (Comparatively) High Multiple in AAPL Stock

The forward price-to-earnings (PE) ratio of Apple stock has risen to 18.9. I usually do not balk at such a multiple for most equities. However, this is Apple. The Apple stock price now stands at around $241 per share. This takes it near all-time highs and puts in a battle with its long-time rival Microsoft (NASDAQ:MSFT) for the world’s largest market cap.

In recent history, a forward PE in the teens (and a trailing PE of 20.5 like we see now) has represented a near-term high for Apple stock. Moreover, we do not yet know if AAPL has established a double top at current levels. Given the uncertainty Apple faces, I would not expect these trends to break at this time.

Uncertainly for AAPL Stock Remains

Uncertainty hurts Apple stock in other ways. AAPL exhibits many of the same characteristics that it had when I recommended not buying in late August. Though optimism has risen about a trade agreement, the U.S. and China have not finalized a deal. Even if they came to an agreement, such an event could easily become a reason to “sell the news.”

Moreover, the company remains heavily dependent on the iPhone for revenue. I think the 5G upgrade cycle will mitigate much of the negativity surrounding the device. After all, analysts forecast 9.5% earnings growth for fiscal 2020.

However, competition from lower-cost phones running Android has many thinking twice about a device that can run as high as the iPhone 11 Pro Max at $1,449. Some competing phones sell for as low as $199. Consequently, Apple has cut prices on some of its older iPhone models.

Moreover, the company proposed new offerings to boost revenue. However, until Apple releases these new applications it is unclear how Apple TV+ will compete against the likes of Netflix (NASDAQ:NFLX) or how much an Apple Arcade will cut into the business of companies such as Zynga (NASDAQ:ZNGA). This creates all the more reason that holders of Apple stock will need to see some upbeat guidance.

The Bottom Line on Apple Stock

Earnings will likely confirm the lack of near-term upside for Apple. Most expect to see a drop in revenue and earnings due to falling iPhone sales. The 5G upgrade cycle will ease some of the pain. However, for Apple stock move higher, investors will need to see new sources of revenue succeed as iPhone sales continue to drop. Moreover, the forward PE ratio has reached the high teens, a valuation where Apple stock has hit a peak in recent years.

This is not to say I have turned negative on Apple stock longer term. I still think Apple produces compelling products. I even purchased a MacBook Air recently. Also, I would never bet against a company whose last reported cash position stood at $210.6 billion. If in-house innovation does not compensate for lost iPhone income, the cash on hand will buy a new source of growth. Apple simply has to find it.

Many reading this have owned Apple stock for the long haul. For them, my recommendation is to collect the $3.08 per share of annual, rising dividends and to ride out the ups and downs.

However, for those who went against my recent advice and bought a short-term position, I expect to see few additional reasons for optimism. These traders should sell before Apple releases fourth-quarter earnings.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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