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Why Apple (AAPL) Stock is a Strong Buy Heading into Earnings

Benjamin Rains

Apple’s AAPL run over the last year, up over 100%, is impressive by its own lofty standards. AAPL shares have surged despite the fact that its fiscal 2019 sales slipped 2%, against a hard to compare 2018.

With Apple’s first quarter fiscal 2020 financial results due out on Tuesday, January 28, it’s time for investors to see why AAPL stock appears to be a strong buy.

More Than an iPhone Company

Apple can thank the iPhone for its $1 trillion market cap and its gigantic pile of cash. The Cupertino, California-based firm’s ability to sell high-priced smartphones and other consumer electronics in a crowded market is somewhat remarkable. CEO Tim Cook and Apple have continued to cultivate the brand and customer loyalty that sees people pay over $1,000 for new iPhones, despite fewer game-changing updates recently.

The company’s new wireless AirPods headphones have also become a hit, while it innovates its Apple Watch— which could one day attract more users for its health-focused features. But more than anything else at the moment, Apple’s services business has driven the stock as it becomes its largest growth unit.

Apple’s services segment features its app store and Spotify SPOT challenger Apple Music. More recently, the firm has introduced a subscription-based video game service, an Apple credit card, and more. Plus, Apple TV+ (which launched in November) hopes to compete alongside Netflix NFLX, Disney DIS, Amazon AMZN, and others in the streaming world for years, if not decades to come.

Apple’s long-term goal is to generate more revenue from its roughly 1 billion active devices. “We now have 450 million paid subscriptions across the services on our platform compared to over 330 million just a year ago, and we are well on our way to our goal of surpassing the 500 million mark during 2020,” CFO Luca Maestri said on the company’s Q4 earnings call.

 

 

 

 

 

More Fundamentals

AAPL shares broke out above their fall 2018 highs last October and they haven’t looked back. Apple stock is up 34% in the past three months, compared to the S&P 500’s 10% climb, as it continues its year-long run as the best performing FAANG stock—miles ahead of second-place Facebook FB.

Apple’s valuation has grown stretched over this period, currently trading at 22.6X forward 12-month Zacks earnings estimates. This marks a five-year high and comes in far above its 15.7X median over the past two years. But the S&P’s valuation is also stretched at the moment.

Apple’s annualized dividend yields 1.00% right now and it continues to buy back stock with the impressive cash pile we mentioned at the top. The firm returned over $21 billion to shareholders through repurchases and dividends in Q4 FY19 alone as it continues on its “path to reaching a net cash neutral position over time.”

 

 

 

 

2020 Outlook & Beyond

Apple’s 2019 revenue slipped 2% after it soared 16% in 2018. But sales picked up in the second half of fiscal 2019 and its services unit climbed 17% overall to account for 18% of total revenue. This made it the second-largest unit behind iPhone’s 55% and worth more than Mac and iPad combine.

Our Zacks estimates call for Apple’s Q1 2020 sales to jump 4.1%, with Q2 sales projected to pop 7.8%. Apple’s fiscal 2020 revenues are then projected to surge 5.8% to reach $275.27 billion, which would easily top 2018.

More specifically, the company’s services business is projected to jump roughly 16% from $46.29 billion to $53.61 billion in 2020. And its Wearables, Home and Accessories unit is projected to jump 27% this year.

Peeking ahead, Apple’s 2021 sales are expected to climb another 8.2% above our current-year estimate to reach $298 billion.

AAPL’s adjusted holiday-quarter earnings are projected to climb 8.4%. Then the iPhone giant’s fiscal 2020 earnings are expected to jump 10.7%, with FY21 set to surge another 16% higher.

 

 

 

 

Bottom Line

Apple executives have been pleased with the iPhone 11’s early success, and analysts are calling for the iPhone 12 to feature some of the biggest updates in years. Plus, AirPods sales are set to climb alongside its growing services unit.

AAPL’s positive earnings estimate revision activity helps the stock earn a Zacks Rank #1 (Strong Buy) at the moment. Some investors might want to wait for Apple to cool off, but that might not happen until the market does, and who knows when that will be.

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