In the latter part of 2018, bearishness took hold of Apple (NASDAQ: AAPL ) stock and sent shares to the $150 range as AAPL stock investors took in the news that the company would no longer issue unit sales numbers for its iconic iPhone device.
CEO Tim Cook reasoned that subscription and app sales mattered more for profitability. By that logic, Apple could afford to offer less transparency into its business each quarter. Now that the shares have recovered, there are three reasons investors should buy Apple stock.
Weaker iPhone Sales Expected
Investors have had more than six months to accept that unit sales for iPhones will fall. Average selling price (ASP) is significantly higher with each successive release of the device. And although loyal customers will hold off upgrading to the latest iPhone, their device will stay in the iOS ecosystem. Even if revenue falls, Apple will enjoy healthy profit margins from sales of iPhone 8, X, XR, and XS Max.
Expect the total profit per user to hold steady or increase, driven by more customers signing up for Apple Music. In April, The Wall Street Journal reported that Apple had 28 million subscribers, 2 million more than Spotify Technology (NYSE: SPOT ). SPOT stock trades at similar price/sales and price/book multiples compared to Apple. Yet Spotify’s price/forward cash flow multiple is 75, compared to 20.5 times for Apple.
Don’t forget that Apple recently launched its News App. By sending notifications for timely news, users who use the app often may end up subscribing to the service. In doing so, they get Apple News Plus, which gives users access to premium newspapers and more than 300 digital magazines.
Look for Earnings Beat on July 30
When Apple reports quarterly earnings on July 30, the company may beat the Q2/2019 EPS estimate of $2.12.
Last year, Apple reported earnings of $2.34, topping the $2.17 estimate. Strong revenues are possible because Apple Music subscription growth is gaining momentum. The iPad and iPad Mini refresh could drive device sales higher. Conversely, the iPad Pro faces stiff competition from Microsoft ’s (NASDAQ: MSFT ) Surface book and Surface tablet. Still, Apple has the AirPod, Watch, and HomePod to offset a drop in Pro sales.
In the unlikely scenario that AAPL stock falls after reporting strong results, the drop gives investors a chance to average down. Most who invest in Apple are in it for the long term. Viewing short-term drops in the stock as entry points played out well in the last decade.
To be sure, weak iPhone sales could spook investors and send Apple stock lower. Yet if consumers are simply holding off on upgrades in general, Apple is not losing market share. So if users are not leaving the iOS ecosystem for Android, Apple subscription and software sales will return high profits.
Service Revenue Will Drive Growth
The second quarter 2019 saw Apple report its best quarter ever for Services, as revenue topped $11.5 billion . Even as worldwide iPhone revenue fell 17%, Services grew to new heights, with more than 390 million paid subscriptions at the end of March, up 30 million in the last quarter. During 2020, Apple expects to surpass 500 million subscriptions.
That is a phenomenal rate of growth. And the strong uptake of Services will include growing App sales. In Q2, the number of paid third-party subscriptions increased by over 40%. Apple has a well-diversified source of revenue from apps; the biggest third-party subscription app accounted for just 0.3% of its total Services revenue.
Apple forecast revenue of $52.5 billion – $54.5 billion for the upcoming report for the June quarter. Gross margin will be around 38%. Operating expenditures will be $8.7 billion – $8.8 billion.
Your Takeaway on AAPL Stock
Apple is confident about the growing revenue from the product category level. More importantly, it expects iPhone sales improving Y/Y in the upcoming Q3 report. Cash flow generation is so strong that AAPL stock repurchase authorization and its quarterly dividend. A dividend hike is unlikely but if Apple does so, look for Apple stock continuing its uptrend.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
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