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Buy Apple (AAPL) Stock on the Dip on Bank of America Upgrade?

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Shares of Apple (AAPL - Free Report) jumped over 3% Monday after Bank of America (BAC - Free Report) upgraded the iPhone giant’s stock. The climb helps continue Apple’s 2019 positivity, which means now might be a good time for investors to consider buying Apple stock on the dip while they still can.

Upgrade

Bank of America analyst Wamsi Mohan upgraded Apple stock from “neutral” to “buy” on Monday, citing pullback-based opportunities and more. The analyst also upped Apple’s 12-month price target from $180 a share to $210 per share. This marked a roughly 21% upside compared to Apple’s closing price on Friday of $172.91 a share.

Mohan said that Apple’s “growth across healthcare, wearables and increasing services penetration,” along with “stability of supply chain order cuts” will help it bounce back. “AAPL stock is down 26% from its peak (S&P down 9%) and up 9% YTD (inline with S&P 500 and below the [tech sector’s return] of 13%),” Mohan wrote in a note to clients.

“Our scenario analysis suggests that shares are discounting a “declining hardware” scenario (ex-cash, services), and the debate hinges on the L/T trajectory. In our opinion, weakness in hardware is not entirely structural. Our new PO of $210 is based on assumptions closer to scenario 2 (flat hardware, and somewhat slower than historical growth in Services).”

 

Overview

As we mentioned at the top, shares of Apple popped 3.46% during regular trading Monday to reach $178.90 a share. This represented a roughly 23% downturn from Apple’s 52-week high of $233.47 per share. Shares of Apple have clearly still outperformed its industry, but its recent downturn has seen its five-year returns slip far behind Microsoft’s (MSFT - Free Report) 195% climb.

Much of Apple’s decline centered on the company’s Chinese and iPhone-related slowdown. Apple and many investors had known for years that the company needed to expand beyond the iPhone as the market became more saturated. Still, last quarter might have been Wall Street’s big wakeup call after iPhone revenues plummeted 15% to help overall sales fall 4.5%. Going forward, Apple faces difficult comparisons and the Chinese economic slowdown only makes the situation worse.

Luckily for investors, Apple is ready to roll out more offerings to try to offset the iPhone slowdown. Apple and Goldman Sachs (GS - Free Report) are reportedly set to offer a credit card that pairs with an iPhone app that aims to help users manage their money. The move is part of Apple’s larger financial tech ambitions that include Apple Pay and could end up growing as Square (SQ - Free Report) , PayPal (PYPL - Free Report) , and others try to shake up the credit card and banking industry.

Meanwhile, Apple is set to introduce its streaming TV service in 2019. The company is said to have spent over $1 billion on original content in order to compete against Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) , Disney (DIS - Free Report) , AT&T (T - Free Report) , and others. Maybe more importantly, CEO Tim Cook is committed to expanding the company’s Apple Watch-style health offerings, which he thinks will play a valuable role down the road.

Outlook & Earnings Trends

Moving on, on our current Zacks Consensus Estimate calls for Apple’s fiscal second-quarter revenue to sink 5.8% to touch $57.60 billion. More specifically, Q2 iPhone revenue is projected to sink 13% from $38.03 billion in the year-ago period to $32.97 billion, based on our current NFM estimate. Apple’s revenues in Greater China are projected to fall roughly 7% to $12.15 billion. This would follow the first quarter’s 27% downturn in the key region that includes Hong Kong and Taiwan and accounts for roughly 20% of total sales. Last quarter, iPhone revenue tumbled 15% to help overall sales fall 4.5%.

On top of that, Apple’s full-year fiscal 2019 revenue is expected to sink 4.2%. Investors should note that the company’s fiscal 2020 revenue is projected to pop 3% above our 2019 estimate, which would still fall below 2018’s $265.60 billion.

At the bottom end of the income statement, Apple’s adjusted Q2 earnings are projected to fall 12.8%, with its full-year 2019 EPS figure expected to dip 4.4%. Furthermore, the chart shows us that Apple’s earnings estimate revisions have trended almost completely downward recently.

 

 

Bottom Line

Apple is currently a Zacks Rank #3 (Hold) based in part on its recent earnings estimate revision activity. The company also faces tougher conditions in China as the economy slows in a market abundant with lower-priced smartphone offerings. The company’s days of massive iPhone unit growth are also likely over for now. Still, Apple is one of the world’s richest companies and boasts 1.3 billion active devices globally.

The company’s stock price rests far below its 52-week high, despite its 2019 climb. Apple stock is also trading at 14.3X forward 12-month Zacks Consensus EPS estimates, which falls almost in line with its industry’s 13.9X average and does come in below the S&P 500’s 16.4X. The company is also a dividend payer. Therefore, it is not too difficult to imagine shares of Apple at least reaching their previous high.

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