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Why Apple Stock is a 'Strong Buy' Ahead of Earnings

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Apple AAPL stock is down roughly 9% from its early January highs ahead of its first quarter fiscal 2022 financial release on Thursday, Jan. 27. The drop comes amid a broader selloff that’s impacted various corners of the market, with tech continuing to take the brunt of the blows.

Tech Selling

The Nasdaq officially entered correction territory Wednesday (down 10% or more from its November highs). The tech-heavy index also recently fell below its 200-day moving average for the first time since the initial covid selloff. And traders are now calling for the S&P 500 to finally test the 200-day as well, though it has further to fall.

The rough start to 2022 comes amid mounting concerns about rising prices and higher interest rates, which negatively impact growth-focused companies the most. The 10-year U.S. Treasury yield hit two-year highs on Tuesday at around 1.88%. All of this has investors nervous.

But taking a step back, the selling appeared due, with the Nasdaq still up 53% in the past two years. More importantly, the outlook for S&P 500 earnings, revenue, and margins remains strong for 2022 and 2023. And interest rates will have to climb a lot higher before they make stocks broadly unappealing.

Clearly, there could be more selling ahead and the big growth names continue to be hammered. That said, investors with longer-term horizons don’t need to time the market precisely, which is extremely difficult. Instead, they should attempt to scoop up strong stocks at discounts when they can.

Zacks Investment Research
Zacks Investment Research

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The Simple Case for Apple

Apple is a consumer electronics and branding titan that grew its sales by 6% to $275 billion during the heart of a global pandemic. Many consumers upgrade to new iPhones, Macs, Watches, and other devices habitually, even if there isn’t a game-changing difference. Many Apple customers rarely even consider buying anything other than an iPhone, opting to stay in the broader Apple universe for various reasons.

Apple’s long-term growth case is not difficult to make in a world full of smartphone and device addicts, especially as its subscriptions grow. CEO Tim Cook is focused on transforming Apple far beyond an iPhone company. The aim is to continually make money from its loyal and growing customer base.

The iPhone still accounts for by far the largest portion of Apple’s sales. But services help pick up the slack in non-release periods and the unit is now clearly the second-biggest revenue driver ($68 billion in FY21 vs. $38 billion for 3rd place wearables, home & accessories).

Apple in early 2021 said it had over 1 billion active iPhones and 1.65 billion total devices, and it reached new all-time highs in Q4. Paid subscriptions surged 27% last quarter to 745 million. These offerings include everything from music to fitness, which comes on top of its highly-lucrative app store.

Apple is also bringing more of its chips in house. Plus, it could enter any number of futuristic growth areas soon or down the road given its massive cash pile. The firm closed last year with $191 billion in cash and marketable securities and $66 billion in net cash (cash, minus debt). Its impressive free cash flow also helped it return $24 billion to shareholders in Q4 through dividends and buybacks.

Zacks Investment Research
Zacks Investment Research

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What Else

Apple’s fiscal 2021 sales soared 33% to crush FY20’s 6%. Last year’s top-line expansion marked its best growth since 2012, topping FY15’s 28%. Looking ahead, Zacks estimates call for another 5% sales growth in FY22 and 7% higher sales in FY23 to reach $410 billion vs. $366 billion in FY21.

Meanwhile, Apple’s adjusted EPS are set to pop 4% in 2022 (after surging 71% last year) and then jump 7.4% higher in FY23. And AAPL’s recent earnings revisions positivity helps it land a Zacks Rank #1 (Strong Buy) right now.

Given this backdrop, it’s no surprise the world’s most valuable company has skyrocketed 320% in the past three years to destroy the Zacks Tech sector’s 100%. Investors should recognize that this includes periods of declines and sideways movement, with the stock up 25% in the last 12 months.

AAPL’s recent pullback has it below its 50-day moving average and closing in on oversold RSI levels (30) at 40. The stock also trades at a 15% discount to its two-year highs at 28.6X forward 12-month earnings. This marks only a slight premium to tech as a whole, despite its significant outperformance.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Bottom Line

Some investors might think it’s too easy to buy Apple, or fear they missed out already. But don’t avoid a money-making machine and the tech powerhouse that continues to grow simply because it appears too straightforward.

Wall Street remains extremely high on Apple, with 18 of the 22 brokerage recommendations Zacks has coming in at “Strong Buys,” with three more “Buys,” and none below a “Hold.” Now might be a solid time to add Apple as a portfolio pillar for the long-haul and a near-term safety-style play, even if some decide to wait for more of the dust to settle.

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