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Apple Tanks, Lowers Q4 Revenue Outlook: Tech ETFs in Focus

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Apple Inc. AAPL disappointed investors at the start of the New Year with a slash in revenue guidance for the holiday quarter. Its shares tumbled as much as 8% in after-market hours, suggesting more pain for the company, at least in the near term.

The stock has been under pressure since the company originally offered revenue forecast for the holiday season in October, following which, it lost more than $350 billion in market value. Notably, Apple dropped about 37% in three months compared with the industry’s average decline of 27.5% (read: ETFs in Focus as Microsoft Races Past Apple).   

Weak Guidance

The technology giant trimmed its fiscal first-quarter revenue guidance to $84 billion from $89-$93 billion. This is also much lower than the current Zacks Consensus Estimate of $91.26 billion. This marks the extraordinary move as Apple cut its quarterly revenue forecast for the first time in more than 15 years, prompted by slowing sales in China and fewer iPhone upgrades due to trade tensions with China and weakness in emerging markets.

According to the Apple CEO Tim Cook, “most of the revenue shortfall to the guidance, and over 100% of year-over-year worldwide revenue decline occurred in Greater China across iPhone, Mac and iPad.” For the fiscal fourth quarter of 2018, about 18% of Apple’s revenues came from China. Cook also cited low-cost battery replacements, price increases based on the strength of the U.S. dollar and fewer carrier subsidies for a lack of iPhone upgrades (read: Should You Take a Bite Into the Beaten-Down Apple ETFs?).

Bright Spots

Despite lowering the guidance, Cook mentioned that many areas have shown remarkable performance during the quarter. Apple's device install base hit a new all-time high, growing by more than 100 million units over the last year.

Revenues outside the iPhone business grew almost 19% year over year, including all-time record revenues from Services, Wearables and Mac. Service revenues grew to more than $10.8 billion and the company is on track to achieve the goal of doubling the size of the business from 2016 to 2020. Wearables grew almost 50% year over year, as Apple Watch and AirPods were wildly popular among holiday shoppers. Launches of MacBook Air and Mac mini powered the Mac year over year revenue growth while the launch of the new iPad Pro drove iPad year over year double-digit revenue growth.

Apple expects revenues in several developed countries, including the United States, Canada, Germany, Italy, Spain, the Netherlands and Korea and few emerging markets, including Mexico, Poland, Malaysia and Vietnam, to hit all-time highs. The company also expects to report a new all-time record for earnings per share.

An Insight to Estimates

Apple has seen declining earnings estimate revisions from $4.74 to $4.66 per share for fiscal fourth quarter over the past 30 days. However, this represents substantial year-over-year growth of 19.79% (see: all the Technology ETFs here).

The stock is currently trading at a PEG ratio of 1.21, much lower than the industry average of 1.87, suggesting that it is a better value stock in the industry. The lower the PEG ratio, the better the value as investors would be paying less for each unit of earnings growth. Additionally, Apple is cheap with P/E ratio of 11.97 compared with 13.69 for the industry.

Further, Apple currently carries a Zacks Rank #3 (Hold) and has a VGM Score of A. It belongs to a top-ranked Zacks industry (top 21%).   

ETFs in Focus

Given the revenue warnings, ETFs having the large allocation to this tech titan is in focus. Below, we have highlighted the ones that have Apple as their top or the second firm with a double-digit allocation.

Select Sector SPDR Technology ETF XLK

This most-popular technology ETF has $17.4 billion in AUM and charges 13 basis points (bps) in fees per year from investors. AAPL takes the second spot and makes up for roughly 18.5% of assets. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

iShares Dow Jones US Technology ETF IYW

This ETF provides investors exposure to the broad technology stocks, with Apple occupying the second position at 14.6% share. The fund has AUM of $3.5 billion and charges 43 bps in fees and expenses. It has a Zacks ETF Rank #1 with a Medium risk outlook (read: 6 Wining ETF Areas From a Late Santa Rally).

Vanguard Information Technology ETF VGT

This fund also targets the broad tech sector with 15.7% allocation in Apple. It has amassed $17.4 billion in its asset base while charges 10 bps in annual fees. VGT has a Zacks ETF Rank #1 with a Medium risk outlook.

iShares Global Tech ETF (IXN - Free Report)

This ETF provides global exposure to electronics, computer software and hardware, and informational technology companies, with Apple taking the second spot at 13.2%. It has $2.2 billion in AUM and charges 47 bps in fees per year.

MSCI Information Technology Index ETF FTEC

With AUM of $1.8 billion, the product allocates 15.1% in Apple. The ETF has 0.08% in expense ratio and a Zacks ETF Rank #1 with a Medium risk outlook.

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