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Should you Buy Apple (AAPL) Stock Ahead of Q2 Earnings?

From January to mid-February, the S&P 500 lost over 10% of its value.  Since then, the market has recovered its losses, and the S&P 500 is currently up 3.5% year-to-date.  Apple’s AAPL share price has mimicked a similar story, and its stock has been in line with the market’s ups and downs so far in 2016.  However, this could all change on the 25th of April.

On this day, Apple will be reporting its second quarter earnings of fiscal 2016.  How will Apple perform, and can it differentiate itself from the broader stock market?

Apple generated 68% of its revenues from the iPhone last quarter.  It’s worth noting that in 2015, the iPhone generated 66.3% of the company’s revenues.  There is a lot of dependence on this single product to drive growth for the company.  This makes the company more risky to invest in, which is part of why Apple is trading at a low forward PE multiple of 11.98. 

Apple’s iPhone sales are stagnating in terms of growth, so investors are waiting to see if the company can bring forth a new growth driver.  Apple Pay seems intriguing, but there’s no telling as to how big it will get at this point.  Apple Pay is a great product, but one must remember that the mobile payment space has other big participants, such as Samsung SSNLF and Google GOOGL.  This new space will continue to see other competitors rise, increasing the risk of people moving away from Apple Pay.

Apple is also exposed to the harsh conditions in the macroeconomic environment.  Global volatility contributes towards why sales are projected to decrease by 3.58% this year.  Apple generated 60% of its sales outside of the Americas in 2015, and China is the company’s next growth frontier.  The Chinese are doing what they can to keep up with growth expectations, but they are faltering.  In spite of propping up equity markets with funds and devaluing the Yuan (China’s currency), growth concerns continue to linger.

Earnings estimate revisions have been mixed for this quarter.  In the last 60 days, there have been six earnings estimate revisions by financial analysts.  Two revisions were made upwards, while the other four were revised downwards.  This has pushed our EPS consensus estimate down over the last 90 days.  Three months ago, our earnings consensus estimated earnings of $2.20 per share this quarter.  Now, we estimate earnings of $1.97 this quarter.

Bottom Line

Apple has beaten our EPS in each of the last four quarters, and there’s a good chance that this quarter won’t be an exception.  However, each earnings beat has been quite modest over the last year.  Apple only beat our EPS consensus by 1.23% last quarter.  Even if the company does beat on our bottom line consensus estimate, there are some unappealing facts which can’t be overlooked.

Apple is very reliant on its iPhone, and there has been no clear sidekick to help in diversifying the company’s revenues.  iPad sales have been inconsistent, and the Mac has not been a superb growth candidate, either.  When you add in the fact that 60% of the company’s sales are outside of the Americas, it becomes pretty clear that the company could make for a risky bet.  The volatility in 2016 will definitely impact the world’s willingness to pay for premium products from Apple.

The cell phone market is growing more and more competitive by the year.  Will Apple be able to differentiate the iPhone from its competitors’ phones over the long run? Will someone else ever make a better phone than the Apple’s?  If the company ever gets any of these questions wrong, its share price will be decimated.  You don’t want to be around when/if that happens, and I can’t recommend the stock unless it has proven itself with a new product capable of properly diversifying the company’s sales.  Apple is a Zacks Rank #3 (Hold).

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