Is Apple Stock Ripe or Overpicked?

Investors are anxiously awaiting Apple’s fourth-quarter earnings announcement on October 30. Apple NASDAQ: AAPL has been on a tear in the run up to earnings. In the last 11 trading sessions, the stock has closed at a record high in six of them. In fact, the stock is the top performing stock in the Dow Jones Industrial Average (DJIA). Not surprisingly, Apple has once again become part of the $1 trillion club as their market capitalization is now over $1 trillion. 

This has at least one analyst, Samik Chatterjee from J.P. Morgan to raise his price target to $275. The other 42 analysts surveyed by FactSet have a $265 price target for AAPL stock. The stock price, as of this writing, is sitting right around $245 per share. 

The reason why analysts are so optimistic is their perception that investor confidence in a “strong multi-year earnings growth trajectory is now higher”.  

What are analysts projecting for Apple’s earnings?

The contradiction with Apple’s stock price hitting record highs is that analysts are projecting revenue to come in flat at $62.91 billion. They are also expecting earnings to fall by 2.4%. 

On the other hand, analysts will be seeking confirmation for a strong first quarter of fiscal 2020 (which ends at the end of December 2019). Analysts are expecting a revenue surge to $86.82 billion with an EPS rising to $4.45. 

Apple has a habit of beating estimates, as well as offering bullish future forecasts. There are reasons to believe this report may be no exception. 

The iPhone 11 has been selling beyond expectations

Many observers (including this writer) felt that demand for the iPhone 11 might be suppressed. The “only” significant feature additions to the iPhone 11 were an improved camera and extended battery life. And, the company will not be launching 5G versions of their iPhone until 2020. 

But the iPhone is selling well. So much so that Apple recently announced that they are increasing production of the iPhone 11 by 10%. The iPhone demand is being stimulated by aggressive promotions that Apple is running with wireless providers such as Verizon NYSE: VZ and AT&T NYSE: T. Let’s face it; it’s a bit easier to upgrade your current iPhone when you’re on an installment plan.

China is providing support for iPhone sales

One of the major headwinds facing China this year was the possibility that the current trade war with China would hurt demand. However, that has not been the case. A leading China analyst, Ming-Chi Kuo boosted his forecast for iPhone 11 shipments by 5 million units. Kuo also said the supply chain will “grow steadily” in the fourth quarter. 

Unlike U.S. consumers, Chinese consumers are showing a preference for the lower-priced iPhone 11 ($699) as opposed to the iPhone 11 Pro ($999). Kuo cites that the iPhone 11 is priced close to the sweet spot for Chinese consumers (i.e. equivalent to 1-1.3 times the average monthly salary in China).

Growth in subscription services is creating a nice one-two punch

The iPhone continues to account for approximately 48% of Apple’s revenue. But subscription services are coming in a strong second. In September, Apple launched its Apple Arcade service. Later this year, the company is scheduled to launch its own streaming service, Apple TV+. 

This is creating two issues for investors. First, Apple is entering a very crowded field that includes entrenched competitors such as Netflix NASDAQ: NFLX, Hulu and Amazon NASDAQ: AMZN. But also has some emerging threats from Disney and NBCUniversal. One way Apple is hoping to nudge their way into the streaming wars is by offering their iPhone subscribers with an aggressive pricing strategy. 

To begin with, Apple TV+ will cost only $4.99 per month which is less than any of the other established services. But as they say in infomercials, wait … there’s more. If a customer purchases a new iPhone, iPad, Mac, or Apple TV box, they can get a year of Apple TV+ for free. 

There are a couple of risks with this strategy. First, analysts will be waiting to see how much offering this free service will eat into future earnings. Second, Apple TV+ will be relying on creating and producing original content. In fact, Apple TV+ will launch with only nine original shows. 

Netflix was one of the first streaming services to see the benefit in creating original content. However, Neftlix had a popular content library to fall back on including shows like The Office and Friends. The loss of these titles to competing services is one of the many reasons Netflix stock is falling. 

A closer look at Apple growth going forward 

Don’t bet against Apple

The long story short for investors is that Apple is, and will remain, a somewhat polarizing stock. There are many investors that keep waiting for the other shoe to drop. But Apple came to the realization awhile ago that they had to find another revenue stream apart from their iconic iPhone. Subscription services are starting to fill that role very nicely. And with those two units making up 75% of the company’s revenue, investors have a strong case for buying Apple stock for the rest of 2019 and into 2020.