Apple (AAPL - Free Report) shares popped Wednesday morning during what has been a hectic time, from antitrust lawsuits to U.S.-China trade war worries. More troublesome, the iPhone giant is coming off a back-to-back dip in quarterly profit and sales. But the firm is determined to push forward with a more diverse future that it showed off at its Apple Worldwide Developers Conference.
Trade War & Antitrust Worries
Apple at the moment is safe from President Trump’s decision to increase tariffs on $200 billion worth of Chinese products to 25%. However, Trump has threated to impose a 25% tariff on an additional $325 billion worth of Chinese exports to the U.S. The Chinese government has countered the Trump administration with its own tariffs.
Yet, Apple might be more concerned about the possibility that the Chinese government calls for boycotts on U.S. companies. This is not hard to imagine if the trade war escalates further, especially since the Chinese market is full of less expensive, Chinese-made smartphone options from the likes of Xiaomi and Huawei.
Meanwhile, on Tuesday one of the first developer lawsuits against Apple was filed in California. The suit claims that the developers are forced to sell their iOS apps through the App Store because of Apple’s monopoly over app distribution. This comes after the U.S. Supreme Court in May allowed antitrust lawsuits against Apple regarding its app store business model to proceed. Apple requires all apps to be sold exclusively through its own app store, where it typically takes a 30% cut.
On top of all of this, new reports say that the U.S. Justice Department and the Federal Trade Commission are possibly preparing to investigate some of the biggest names in tech, including Apple, for possible antitrust violations, according to the Wall Street Journal. This list also includes Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , and Google (GOOGL - Free Report) (also read: Buy Netflix Stock as FTC, DOJ Set Antitrust Sights on Tech Giants).
Privacy, WWDC & Services
Apple over the last year has spent heavily on advertising that touts its commitments to privacy in order to get out ahead of what CEO Tim Cook and others see as possible threats. Facebook helped kick off this wave of privacy worries that have morphed into more full-throated attacks from government officials in the U.S. and Europe regarding Facebook, Google, and others like Apple and their access to user data and control over the spread of information. Fittingly, Apple dove into many of its new privacy features during the first day of its developers conference.
Apple said that its next-generation operating system, iOS 13, which is due out this fall, is set to offer sign-in capabilities that offer users the chance to log into apps without providing any personal information. Apple executives said that it would instead auto-generate random email addresses provided by the iPhone maker. The company also talked about some other new privacy features. Clearly, developers, who need or want at least some user data, won’t love this and could help further their antitrust claims.
With that said, Apple does make money from devices, while its tech titan peers Google and Facebook mostly profit from ads and the collection of user data. To that end, Apple showed off its brand-new, iPad-specific operating system, iPadOS, aimed to help it function more like a traditional computer. Meanwhile, the Apple Watch will have its own app store in a move to try to untether the smartwatch from the iPhone.
Furthermore, Apple showed the first trailer from one of its new TV shows called For All Mankind. This is part of the company’s streaming TV service that is projected to launch in the fall and hopes to compete against Netflix and Disney (DIS - Free Report) . Apple TV+ is part of its larger Services push that includes the company’s Spotify (SPOT - Free Report) competitor Apple Music, its new $9.99 per month magazine-heavy news service, and more.
Apple’s Q2 2019 revenue fell 5.1%, which marked a larger decline than Q1’s 4.5% decline. More specifically, second-quarter revenue in Greater China tumbled 21.5% from the year-ago quarter to $10.22 billion. Overall, Greater China accounted for roughly 18% of Apple’s total quarterly revenue. Plus, Q2 iPhone sales tumbled over 17% and made up over 53% of sales.
Investors should note that Apple’s Services sales climbed 16% in Q2 to reach $11.45 billion and account for nearly 20% of total quarterly revenue. This, however, came in below Q1’s 19% expansion and marked a slowdown from other recent periods.
Our current Zacks Conesus Estimates call for the firm’s adjusted full-year earnings to slip 3.6% on the back of a 3.3% revenue decline. Looking further down the road, the company’s fiscal 2020 earnings are projected to jump nearly 11% above our current year estimate on roughly 4% higher revenues—which are expected to come in above 2018’s total.
Apple looks poised for a small downturn in 2019, but this has happened before (as the revenue chart above shows). In the end, Apple is not going anywhere, anytime soon and it pays an annualized dividend of $3.08 per share at the moment, for a 1.71% yield. The company is also trading at 14.6X forward earnings estimates, which marks a discount compared the S&P 500’s 16.3X average and its own five-year high of 19.7X.
AAPL’s price/sales ratio of 3.2 also marks a discount compared to Facebook’s 8.1 and Microsoft’s (MSFT - Free Report) 7.7. On top of its solid valuation metrics, Apple stock hovered at $182.10 per share through morning trading Wednesday, down 22% from its 52-week highs. Apple is currently a Zacks Rank #3 (Hold) that might be worth buying on the dip despite all of the current headwinds.
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