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Buy Apple Stock Before Q1 Earnings on Services, AirPods & iPhone Growth?

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Apple (AAPL - Free Report) shares have skyrocketed nearly 110% in the past 12 months, including a 12% climb in 2020. Now the question for investors is should they think about buying the iPhone giant’s stock before Apple reports its Q1 2020 earnings results on Tuesday, January 28?

Beyond the iPhone?

Apple’s non-iPhone business has become a focus on Wall Street in recent years. Yet, the Cupertino, California-based company still relies heavily on the iPhone. The device has helped propel Apple to its current $1.4 trillion market cap since it launched in 2007. Today, consumers around the world consistently shell out over $1,000 to buy new iPhones.

Apple executives are pleased with the new iPhone 11’s early success. And analysts and tech insiders predict that the iPhone 12, which is excepted to debut in the fall of 2020, will feature some of Apple’s most game-changing updates in years.

That is good news considering that iPhone sales still accounted for 55% of total revenue in 2019. However, this marked a decline from 2018, when the smartphone pulled in 62% of overall sales.

CEO Tim Cook and Apple have known for years that they needed to expand beyond the iPhone, and they have. Yet, new reports suggest that Apple will soon start production on a low-cost iPhone to help possibly address the rapidly expanding low-cost smartphone market in China, India, and beyond. 

 

 

 

 

Services & Wearables

The iPhone remains Apple’s largest revenue contributor, but its other businesses have driven sales growth in recent years.

Apple’s services segment features its app store and Spotify (SPOT - Free Report) challenger Apple Music. More recently, the company has rolled out a subscription-based video game service, a credit card, and a magazine-heavy news service. Then, in November, it debuted its streaming TV platform.

Apple TV+ features Hollywood stars both in front of and behind the camera and some of the shows have earned some critical buzz. The streaming TV platform only costs $4.99 per month, which could help it as Apple competes for consumers alongside Netflix (NFLX - Free Report) , Disney (DIS - Free Report) , Amazon (AMZN - Free Report) , and others.

The company’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 its Q4 earnings call.

Along with the much-talked-about services unit, Apple’s wearables business has thrived recently, driven by its wireless AirPods headphones. The Apple Watch also has more health-focused features than ever, which is part of the reason why Alphabet (GOOGL - Free Report) bought Fitbit (FIT - Free Report) .

 

 

 

 

2020 & 2021 Outlook

Apple’s revenue dipped 2% in 2019, after sales soared 16% in 2018. Despite the decline, sales picked up in the second half of 2019.

Looking ahead, Apple’s Q1 2020 sales are projected to jump 4.1%, based on our Zacks estimates. Meanwhile, Apple’s fiscal 2020 revenues are projected to surge 5.8% to reach $275.1 billion, which would easily top 2018. AAPL’s 2021 sales are then expected to jump another 8.8% above our current-year estimate to reach a whopping $299.2 billion.

In terms of individual segments, our Key Company Metrics call for Apple’s services business to jump roughly 16% from $46.3 billion to $53.7 billion in 2020. This would roughly match the unit’s 17% expansion in 2019 that helped services account for 18% of total sales—second-largest unit behind iPhone and worth more than Mac and iPad combine.

Meanwhile, Apple’s Wearables, Home and Accessories unit is projected to jump 27% in 2020. This would come on top of 2019’s 41% expansion.

And we can’t forget the iPhone. Apple's fiscal 2020 smartphone sales are expected to climb marginally from the year-ago period.

At the bottom end of the income statement, AAPL’s adjusted Q1 earnings are projected to climb 8.4%. The company’s fiscal 2020 EPS figure is expected to jump 10.7%, with FY21 set to surge another 16.7% higher.

 

 

 

 

Bottom Line

Apple’s valuation has grown bloated as it soars, up from $151 a share in January 2019, all the way to Wednesday’s new intraday high of $319.99 per share. AAPL is trading at 22.9X forward 12-month Zacks earnings estimates.

This marks a 10-year high and comes in far above its 15.3X median over the past three years. However. the S&P’s valuation is stretched, and fellow $1 trillion titan Microsoft (MSFT - Free Report) is also trading at new 10-year highs of 29.1X.

Value-minded investors might want stay away, or wait for a pullback, which could come after earnings if investors take home some profits, shy away due to worse-than-expected guidance or a miss.

Apple is currently a Zacks Rank #2 (Buy), based on its upward earnings estimate revisions. The company also pays a dividend, which yields about 1% at the moment. And who can forget about the massive pile of cash Apple sits atop that helps it buy back shares, as it continues on its “path to reaching a net cash neutral position over time.”

Apple stock has helped drive the current bull market and it could continue this run for years, which makes it hard for investors to stay away from. Yet, waiting until after the closing bell on Tuesday, January 28 to decide what to do with AAPL might be prudent as playing stocks around earnings is hard.

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