Apple May Have To Beat and Raise To Keep The Stock Moving Higher

Michael Kramer and the clients of Mott Capital own AAPL

Apple Inc. (AAPL) will report results on Thursday, October 29, after the close of the trading session. Analysts’ consensus estimates forecast that earnings fell in the fiscal fourth quarter on flat revenue. Those results may not even matter. Investors have already started to turn their attention to the fiscal first quarter and any commentary Apple has on the launch of its newest iPhone.

The stock has had a healthy 2020, with the shares rising by more than 50%. But since peaking on September 2, the stock has fallen sharply, nearly 17%. Still, despite the drawdown, the shares are expensive at current levels, which could continue to weigh on the stock, even if they report strong fourth quarter results.

Looking Ahead

The tremendous run-up for the stock in 2020 came on big expectations for the launch of its 5G iPhone release. But now, investors will begin to turn their attention to how many phones the company is selling and what it is likely to mean for future revenue growth. That means investors will focus on any guidance the company provides and could disappoint should the company not provide guidance.

Forecasts

Analysts currently estimate that the fiscal fourth quarter earnings dropped by almost 8% to $0.70 per share, based on data provided Refinitiv. Meanwhile, revenue is forecast to fall by 50 basis points to $63.7 billion.  Overall, iPhone sales are expected to be very weak, dropping by 14% to $28.7 billion. This quarter’s iPhone launch was delayed and contributed to the significant drop in the segment’s sales this quarter.  

While the fourth quarter is expected to be weak, the first quarter is expected to be very strong, with revenue forecast to rise by 10% to $101 billion and earnings forecast to grow by 10% to $1.37 per share. Meanwhile, iPhone sales in the fiscal first quarter are forecast to rise by 7.5% to $60.1 billion.

Valuation is Stretched

Growth rates for the full-year 2021 are even more prominent. Analysts estimate earnings in fiscal 2021 to rise by 20.3% to $3.90, with revenue growth of almost 14% to $311.3 billion. Those significant growth estimates have helped to push Apple’s stock to its highs valuation in years in nearly a decade.

The stock’s big problem will come as investors begin to turn their attention away from 2021, as growth rates normalize. Analysts currently estimate a significant slowdown in earnings growth in 2022 to 9.5%, while revenue growth slows to 5.3%.

To keep that earnings multiple at these high levels, the company will need to post better than expected results and provide guidance, which will prompts analysts to boost their estimates for 2021 and 2022. Anything short of that makes it hard to support the current earnings multiple as the year continues to move forward.

It isn’t too suggesting that Apple has a gloomy outlook; it merely indicates that Apple’s stock has likely gotten a little bit ahead of itself. It may mean that the stock has entered a consolidation period, as investors await the next major catalyst.  

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.