Apple Earnings Are Coming — Here’s Why You Should Remain a Buyer

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Apple (NASDAQ:AAPL) is a stock that has always attracted significant interest due to its products and the folklore surrounding its co-founder, Steve Jobs. It was the first public U.S. company to be valued at over $1 trillion back in August 2018 and is currently the biggest constituent in the Nasdaq Index and S&P 500.

Apple Earnings Are Coming -- Here's Why You Don't Sell

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The company will announce its first-quarter earnings later on today, with all eyes toward sales for the iPhone 11. J.P. Morgan’s Samik Chatterjee is very bullish on the stock on the back of strong showing for the Apple Watch and AirPods. Chatterjee is forecasting gross margin of 38%, with Services gross margin alone coming up to 64.5%.

Apple stock has been on an all-time high recently and is still soaring at this point, buoyed by holiday sales on its iOS platform and upbeat forecasts regarding its first-quarter earnings. AAPL is a blue-chip stock, and although there were concerns over its long-term vitality, the recent bull run confirms that Apple is a must-have in your portfolio.

Any investor worth his or her salt knows that Apple is a long play, and although everyone is expecting an excellent first quarter, there are deeper fundamental reasons why you should always be bullish on this stock.

We outline some of them here.

Shifting Focus From the iPhone

One of the most significant issues AAPL will face moving forward is how it will handle its device business, as the services segment generates higher margins and becomes a larger player in its operations. For a long time, AAPL has prided itself on low-margin iPhone sales; however, services will be the foundation of the company in the long term.

In the 2019 fourth quarter, Apple Services revenue grew by 18% to a record $12.5 billion, with analysts predicting double-digit growth moving forward.

The company is conscious of this fact and has pivoted itself away into other service areas such as Apple TV+, its answer to Netflix and Amazon. Wearables, which includes product offerings like Watch and Air Pods, saw a 40% increase in sales last year and is another example of how Apple is no longer a one-trick pony.

Excess Cash

Apple saved billions of dollars after the Trump administration unveiled the Tax Cuts and Jobs Act — the most substantial overhaul of the tax code in three decades. The iPhone maker saw its effective tax rate decline to 18.3%, compared to 24.6% in 2017. Apple put the excess cash it received from the tax cut to good use through share repurchases, and although the Trump tax cut was the cause of a significant windfall, share buybacks are a long-term strategy that the company has pursued for at least seven years.

In the fiscal fourth quarter alone, the company ended up spending $17.9 billion to repurchase 92.6 million shares, a slight increase in the $17.0 billion it spent in the previous quarter. Assuming the firm continues to spend its cash on its aggressive repurchase program, shareholders are likely to remain happy, and the share price should reflect the sentiment.

A Lover Not a Fighter

The China-United States trade war remains a hot topic in the news, and although there are signs that relations are thawing between the two countries, there is still substantial skepticism on both sides. President Donald Trump stepped up protectionist measures in 2018 against Chinese goods and services, and, in response, Beijing also placed tariffs on American products, severely jolting sectors like agriculture. Luckily, Apple’s senior management has managed to carve out space for themselves in China that few tech companies enjoy. Apple’s Chinese business segment remains robust, with iPhone sales increasing more than 18% in China last month.

An Ecosystem Like No Other

Apple is arguably the best tech company when it comes to partnering software and hardware. The iPhone is an excellent example of how Apple has leveraged its powerful brand to support services, which is twice the size of its devices segment and has higher margins as well.

The AirPods Pro is an excellent example of Apple’s influence on its consumers. Applications like Apple Music, Apple Pay, iCloud and Apple Care, can only be accessed from an iPhone — a dream scenario for any tech company.

Iron Tight Numbers

Apple posted revenue of $64 billion in the fourth quarter, a rise of 2% from the year-ago period, while quarterly earnings per diluted share increased 4% to $3.03. Looking forward, the company is forecasting revenue between $85.5 billion and $89.5 billion for the first quarter, with gross margins of between 37.5% and 38.5%. These are incredibly ambitious numbers, but the company can afford this level of optimism since it has a long history of beating analysts’ estimates.

The introduction of 5G will lead to higher iPhone sales as consumers look to buy new phones with 5G capability, and therefore 2020 could be an excellent year for the company in terms of device sales.

Wedgewood Partners, a hedge fund long on the stock, had the following to say on the topic in its recent quarterly report:

“We expect Apple’s consolidated revenues will accelerate over the next 12 to 18 months as they complete the development of 5G capable mobile devices. Despite a quickly growing, high-margin software franchise, Apple continues to trade at undemanding earnings multiples.”

Bottom Line on Apple Stock

Apple is in the box seat heading into earnings season, with robust forecasts in both the device and services segments. Add to that its position in China, its dividend yield and its aggressive share buybacks, and you have a stock positioned to go as high as $350 by the end of the year.

Apple has all the cards at this point and can play around with several strategies moving forward. They can stall their buyback program to redirect funds to their operations; a move shareholders may favor over buybacks.

On the flip side, the company can keep long-term shareholders happy through repurchasing stock and maintaining dividends at a healthy clip ¾ Apple has a five-year dividend growth rate of 10.49% and a payout ratio of 25.65%. Either way, the P/E ratio of the stock is 26.74, a record for Apple, but still lower than a lot of its fellow tech giants, showing that all signs point upward for the stock.

With such good numbers, AAPL should continue to see record highs in 2020. There is no stopping this one.

As of this writing, Faizan Farooque did not hold a position in Apple stock.

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