Is Apple Stock A Buy Or Sell After Recently Announced Earnings?

Summary

• In last week's earnings release, Apple posted record-setting June quarter results, with total net sales of $81.4 billion, up 36% year-over-year.
• Yet, warnings about supply chain constraints and service revenues returning to more typical levels took its share price by surprise, with a same day drop of as much as 3%.
• However, the headwinds are expected to be temporary with no significant impacts to Apple's long-term growth prospects and valuation.
• Apple is expected to keep delivering unprecedented growth, underpinned by continued global demand for its products and services in the long run. And the recent price pullback makes a great buy opportunity for those looking to participate in the company's long-term gains.

Justin Sullivan/Getty Images News

Just a week ago, Apple (Nasdaq: NASDAQ:AAPL) reported record-setting June quarter results that had crushed market expectations. The Cupertino-based tech giant recorded largest quarterly revenues ever of $81.4 billion, which were up 36% from the prior year and outperformed the average Wall Street forecast of $72.9 billion and our previous coverage projections of $76.5 billion by nearly $10 billion.

The company also saw robust double-digit growth across the board from products and services to every geographic segment, with the installed base of devices and paid service subscriptions reaching an all-time high; the stellar results were also indicative of increased market penetration with the largest double-digit growth recorded for switchers and upgraders ever for a June-quarter, marking another record-breaking milestone in the books this quarter and continued dominance across all markets for Apple.

Yet, Apple’s shares slipped as much as 3% following the earnings call and continues to be down close to 1% since July 27^th. The stock also has not fared well amongst its FAANG counterparts in recent weeks from the stock sell-off triggered by fear that the latest resurgence of the coronavirus’ delta variant could erode economic growth.

The contradicting movement in Apple’s share price compared to its stellar June quarter financial results allegedly stemmed from management’s warning of decelerated growth for the upcoming September quarter as lingering supply chain constraints are expected to place an adverse impact on product sales, especially on the revenue-leading iPhone and iPad categories; other headwinds also include weaker FX gains and anticipated slowed growth in the services category as demand returns to pre-pandemic levels following above-normal June quarter results.

However, we consider anticipated headwinds as only short-term impacts that will not result in permanent losses for the company. The Apple stock remains primed for further upside considering the rising global demand for its products and services. Despite the supply crunch and decelerated growth anticipated for the upcoming September quarter, our outlook remains bullish on Apple with upside of more than 15% based on the last traded share price of $145.52 on August 2^nd. With Apple’s stock price still down 0.85% from its earnings call on July 27^th and down close to 3% from its mid-July peak, we consider the recent price pullback an advantage slated for long-term gains.

Strength in Overcoming Lost Sales from Supply Constraints

One of the key drivers for slowed growth anticipated for the September quarter is the ongoing chip supply shortage, which had previously caused more pervasive impact to the automotive industry but has now trickled down to consumer electronics. And Apple, who has its proprietary chips made by the world’s largest contract chip manufacturer, Taiwan Semiconductor Manufacturing Company (NYSE: TSM or “TSMC”), has not been spared from impact, with management warning of a supply constraint for the legacy semiconductor nodes used in the display and audio functions of its best-selling products, which is expected to drive lower sales in the near term.

TSMC has also warned the chip shortage will likely continue into the following year, which is consistent with the timeline issued across all impacted industries. Although management has not provided a quantified range for the anticipated impact on the September quarter’s results, it is expected to be far more severe than what was experienced in the June quarter, which was on the low end of the $3 billion and $4 billion range estimate provided in April.

However, the continued acceleration in global demand for iPhones and iPads is expected to more than compensate for the upcoming loss of revenues in later periods as “deferred” sales when raw material supplies return, and pending demand is fulfilled. To date, 97% of customers who have purchased from the iPhone 12 family have indicated appreciation for the enhanced 5G speeds, alongside improved chip technology and camera quality.

The product category has also seen strong upgrade and switch rates in recent months as users continue their transition from legacy iPhones and other smartphones to the latest and greatest 5G-enabled iPhone. Considering 5G technology is still in early stages of adoption with low penetration rate, there is still significant additional growth opportunities available for the current and future 5G-enabled iPhone models.

Global demand for 5G-enabled devices is expected to grow at a compounded annual growth rate (“CAGR”) of 38% into 2026, which further corroborates the expectation that potential lost sales from the ongoing supply shortage will not be permanent as demand for iPhones will continue to persist at high levels and make-whole lost sales in later periods when chip supplies return. A similar trend is expected for iPad demands in the long run, as it has proven itself during the pandemic to be a versatile and affordable tool to support creativity and social connection.

The production and sales bottleneck caused by the ongoing global chip supply shortage will only be a temporary pause to Apple’s iPhone and iPad hot streak, which is expected to resume in strength when the supply chain finds alleviation to its current crunch sometime next year. And when this happens, we should be expecting above-normal sales levels underpinned by robust demand, similar to those observed in the June quarter.

Outperforming Competition in the Services Segment with Innovation

Although the above-normal growth in the services business segment observed during the June quarter is expected to revert to more moderated historical levels going forward, Apple has continued to be diligent in rolling out “innovative new features and programming” to increase reach and maintain market dominance in the increasingly competitive landscape.

Apple’s services business segment – which includes iCloud, Apple TV+, App Store, Apple Music, Apple Podcasts, advertising, payment and other service offerings – currently competes head-on with other prominent service providers like Spotify (NYSE: SPOT), Netflix (Nasdaq: NFLX), Amazon.com (Nasdaq: AMZN), Google (Nasdaq: GOOG) (GOOGL) and Facebook (Nasdaq: FB). In order to maintain its established reputation for innovative technology and grow its loyal fanbase, Apple has recently introduced several new upgrades to existing service offerings at its most recent Worldwide Developers Conference (“WWDC”).

The new exciting features include Spatial Audio and Lossless Audio for Apple Music, which enables an “immersive” listening experience and provides access to the studio quality of original audio files at no additional cost – a competitive advantage to audio streaming leader Spotify’s “HiFi” equivalent, which will likely come at a higher price tag upon launch. And for Apple TV+ – Apple’s gateway to the fast-growing video-streaming market – the company has continued to produce quality programming, which is proven through the 35 Emmy Nominations that it has received this year.

A new generation of the Apple TV, which includes a Siri-enabled remote and enhanced colour balance technology, has also been unveiled to complement its improved programming, which is expected to further enhance customer traction for the segment. The tech giant has also rebranded its iCloud service to iCloud+, with additional upgrades including enhanced privacy features and expanded HomeKit Secure Video support to accompany its suite of smart home devices at no additional costs.

Other recently launched and enhanced services include Apple Podcast subscriptions, Apple News+ and Apple Fitness+, which could be bundled through Apple One at a discounted subscription rate. The Apple One bundle, which was launched in Q2, has already seen incredible success with increasing adoption rates that continue to drive overall growth within the services business segment.

Overall Financial Prospects

Considering the above analysis on Apple’s current operating environment, the recent headwinds that will drive decelerated growth during the September quarter are expected to be temporary and will be overcome with ease in the long run. Our base case forecast projects total net sales of $85.6 billion for the September quarter, representing 32% year-over-year growth, which is consistent with management’s expectations for strong double-digit year-over-year growth that will be slightly lower than the 36% reported for the June quarter.

Source: Author, with data from our internal financial forecasts (Apple_-_Forecasted_Financial_Information.pdf).

Our projected total net sales for the September quarter consist of $67.6 billion in product sales, up 35% from the prior year, and $18.0 billion in service sales, up 24% from the prior year. Altogether, our base case forecast projects total net sales of $368.1 billion for FY 2021, which represents year-over-year growth of 34%. The company’s net sales are expected to maintain accelerated growth at a CAGR of 8% towards $534.4 billion by FY 2026 due to increasing adoption and integration of technology and digital media into both professional and personal aspects of day-to-day routines.

Source: Author, with data from our internal financial forecasts.

Gross profit margins are projected at 41.7% for the September quarter, which is consistent with management’s guidance of approximately 41.5% to 42.5% considering the higher freight costs expected for this quarter, offset by an overall decline in component supply costs as product sales continue to scale.

Total operating expenses are projected at $11.4 billion for the fiscal year’s fourth quarter, which consists of $6.0 billion related to research and development efforts, and $5.4 billion related to selling, general and administrative expenses; this is consistent with Apple’s cost structure observed in recent periods, and in line with the estimated range of $11.3 billion and $11.5 billion provided in management’s guidance.

As a result, our base case forecast projects total cost of sales of $214.5 billion, and total operating expenses of $43.9 billion for FY 2021. And a similar cost structure is expected to apply into FY 2026 to support Apple’s continued growth in its products and services categories, as well as across all geographic segments in which it currently operates in.

Source: Author, with data from our internal financial forecasts.

Altogether, our base case forecast projects FY 2021 net income of $94.8 billion, which represents year-over-year growth of 65%. The bottom line is forecasted for further growth at a CAGR of 7% into the next five years, resulting in projected net income of $132.5 billion by 2026.

Source: Author, with data from our internal financial forecasts.

i. Base Case Financial Projections:

Source: Author, with data from our internal financial forecasts.

AAPL Stock Valuation

Our revised price target for Apple based on updated information from its recent earnings release is $170.91. This represents upside potential of 17.4% based on the last traded share price of $145.52 on August 2^nd.

Source: Author, with data from our internal valuation analysis.

To arrive at the $170.91 price target, we have applied a WACC of 8% to discount Apple’s projected free cash flows over a five-year discrete period; the WACC is consistent with Apple’s current risk profile and capital structure, which includes its latest four-part debt offering totaling $6.5 billion. Our valuation analysis also assumes a 19.7x EV/EBITDA multiple, which is in line with guideline public companies and precedent transactions within Apple’s industry peer group, and is reflective of current market expectations for Apple’s business growth potential in the long run.

i. Base Case Valuation Analysis:

Source: Author, with data from our internal valuation analysis.

In order to validate our foregoing analysis that the adverse impacts to sales resulting from supply constraints, moderated services segment revenues and less favourable FX are only temporary and will not materially change Apple’s upside potential, we have also performed a sensitivity analysis to quantify the impact to FY 2021 revenues needed to decrease our base case price target of $170.91 by 10%.

Based on our sensitivity analysis, FY 2021 revenues of $301.5 billion with growth at a CAGR of 10% into 2026, while holding all other valuation assumptions (i.e. cost structure, WACC, EV/EBITDA multiple) discussed above constant, would result in a price target of $153.82, which is 10% lower than our base case price target of $170.91.

Considering year-to-date total net sales of $282.5 billion, Apple would only need to achieve total net sales of $19.0 billion for the September quarter to maintain a projected equity value of $2.5 trillion or $153.82 per share, which is highly unlikely even under supply constraint pressures and reduced services segment sales based on the company’s current growth trajectory. As such, we do not consider the near-term impacts related to supply constraints, moderated services segment revenues, and unfavourable FX a catalyst for permanent loss to Apple’s valuation.

i. Revenue Sensitivity Analysis:

Source: Author, with data from our internal valuation analysis.

Conclusion - Is AAPL Stock A Good Buy?

Considering Apple’s growth prospects, the recent price pullback makes a great buy opportunity for those looking to participate in the company’s long-term gains. The near-term headwinds related to industry-wide supply constraints and normalized services segment revenues are not expected to materially change Apple’s growth trajectory nor valuation in the long run.

Any lost revenues in the September quarter will very likely be recouped when the supply chain restores its balance, considering the continued surge in demand for iPhones and iPads underpinned by ongoing 5G transition and the increasing need for versatile portable smart devices to enable online access at all times. As a global industry leader with successes achieved to date that very few could match, Apple is poised for further upside realization in the long run.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[JSB163]

Given all the naysayers usual comments over the decades, I must say that the only issue holding back apples growth is their ability to hire more talented engineers, software and marketing professionals. IMO

[User 3434471]

It all hinges on whether or not they can continue to convince their technically impaired users and status symbol seekers to continue buying extremely high profit devices they don’t really need.
The pandemic continuing would probably help in that regard. They would get a lot of the money that would otherwise go to expensive vacation trips.
They will have some headwinds, if all the people who really cared about 5G already bought their phones in the last six months to a year And the variant virus Becomes less concerning to the general public.
What they should really do to maximize shareholder value is turn Mac Pro hardware design over to a newly purchased PC vendor turned Apple subsidiary, who could make sure it gets upgraded every year to keep up with the competition and possibly even price it affordably enough for companies to consider buying.
I can make a Mac Pro that would outsell what Apple is selling in my garage

[vicwinkler]

@donfdraper eh, you want to know something?
(1) More than 75% of the highly-educated and technically top-tier cyber security engineers I have worked with prefer MacOS -- the second choice has been Linux.
(2) I generally get about 7 years out of one of my Apple computers. And, I absolutely upgrade the OS within a year of a new major release (always surprised at how well and fast it runs when I do). I also am still quite happy with my iPhone X. And multiple older devices, including: Several iPads and several Mini's...

So, I don't know on what basis you formed your opinion but it is way out of line with what I see in my world. From your last sentence alone it is hard to form any opinion other than you are arrogant and possibly delusional

[User 3434471]

@vicwinkler (1) "Macs have long had a reputation of being more "secure" than Windows PCs, with users believing that Apple machines are impenetrable to cybercriminals planning to carry out malware attacks. But the reality is less clear-cut. Data shows that both platforms are plenty vulnerable to security threats. According to the most recent State of Malware Report from information-security company Malwarebytes, in 2019 the average Mac faced more malware attacks than the average PC did, for the first time ever. Not only was there a significant increase in the overall prevalence of threats against Macs in 2019, but the number of attacks per Mac was almost double that of PCs."

www.tomsguide.com/...
Apple also abandons iOS much sooner than Windows devices are left behind, tempting owners of expensive iPad Pros to consider using them without security updates. A dual-core desktop from 2009 will be able to securely use Windows 10 through 2025.
(2) My 12 year old dual-core Windows tower system works just fine with Windows 10 for web browsing, Microsoft Office, email and just about any other use except playing first person games. There are many equally "ancient" Windows PCs used in industrial applications because of their using proprietary applications. Tower PCs do a much better job of dissipating heat for heavy duty use compared to Apple's relatively svelte artistic designs, leading to better long-term reliability. You can actually upgrade a Windows PC's hard drive, memory or video card yourself with minimal skills. The business world has Wintel and Linux workstations, not Apple's alternatives, with few exceptions
The delusional people are the ones thinking they're getting a "better deal" without bothering to compare the specifications, benchmark scores or prices of potential alternatives. Rational buyers dig into the facts underlying marketing hype. Trust the experts, not other naive consumers having opinions based on outdated and inaccurate information.

[vicwinkler]

@donfdraper I think the evidence is clear that the Apple platforms are less vulnerable, but yes, they are still vulnerable.

As a published author, former researcher and technology leader in cybersecurity I am not going to change your opinion about this field.

The question when you buy a computer is not just price, and in my case I value the lack of irritation of chasing down some obscure control in an app on Windows. In contrast, MacOS and iOs have actual user-centered design principles that put the user experience front-and-center. Again, I value that and am happy paying for it. Don't presume that your metrics for "low price" are metrics that I think are key. I don't know what you drive, but our decisions on buying cars are also more than cost...

[SEC Investigator2]

For those who are totally clueless, yesterday between 3:58-4:00PM, 6M fake shares were dumped to drop Apple down. During AH's trading, those same criminal manipulators bought 2.4M shares off those fake shares. The 4-1 split has allowed this type of stock/option manipulation. The purpose of the so called buybacks was to reduce the share count. The 4-1 split dumped 16B shares on the open market, equivalent to a dump truck of jelly beans dumped in the auditorium of a elementary school. Hope I simplified this enough for the clueless.

[nate311]

@SEC Investigator2 and you know about these fake share drops how?

[freshbeginnings2006]

Finally, an author who understands that supply chain problems are only indicative of a larger and prolonged super cycle. More I hear about supply chain problems, I get more optimistic about AAPL LEAPS.

[vb_sa]

What recent pullback are you talking about? Apple is still hovering around all time highs.

[deadhead213]

I have held $aapl since the days of Steve Jobs! I can’t begin to tell you how as an investor I have been rewarded 10 fold. I continue to add and every time I here “ wait for it to drop” I chuckle, because clearly, the naysayers never held aapl, or realize this is one every investor in individual stocks must own. I gather double digit growth has no meaning to some, nor does buybacks, or increased dividends. Some of you are best off investing in gme or amc..

[Livy Investment Research]

@deadhead213 Thank you for your comment!

Apple has been and continues to be one of the most rewarding long-term investments to hold on to. Their business has demonstrated an ability to generate significant yet sustainable growths since the Steve Job days and now again under Tim Cook’s leadership, which paves way for further promising price hikes in the next five years.

[Zephyr512]

wait for $125 or less......the stock should have rallied on the numbers....it didn't...so, the market is saying wait.....take profits.....reengage at a lower entry.
If you are a long term Apple investor, take some off the table....reallocate....convert an 88 cent dividend to a $5.20 dividend.....no brainer.....

[crusmon6]

@Zephyr512 Sell Apple and give 20% of my profit on 1500 shares to Biden and Newsom? Then wait until Apple drops 20% to buy it back seems like an exercise in futility. I think I'll just keep holding Apple instead of flushing my money down the drain!

[mako26]

@Zephyr512 what's your approx target date for $125 ? 60 day window ??

[Macking]

3% can hardly be classified as a pullback, but okay. Difficult to argue against the numbers that $AAPL has put up, but I sold at $147 yesterday. I think its stretching its valuation for the time being. I rather put the funds to work where I think there is greater near-term upside ($AMZN for one, especially if Delta continues on its current uptrend). I’ll be a buyer again the next time it dips below $115. I think we may get a chance this fall.

[Seekingbuddah]

@Macking dip below 115 good luck waiting on that.

[Livy Investment Research]

@Macking Thank you for your comment.

A dip below $115 is quite unlikely for Apple under its current operating environment and business outlook. The company’s EV/EBITDA would have to fall closer to 10x compared to its current near-20x and/or grow sales by under 5% on an annual basis to reach a price this low, which does not align with its current growth trajectory even with headwinds related to supply constraints and inflation.

[nate311]

@Macking sold entire position? there hasn't ever been a good time to not own any aapl. it should always be a core position, snipping some off when you believe it overvalued, adding when undervalued. that's been my aapl plan for 2 1/2 decades.

[Randol33]

Its always a buy at any price. Don't even waste time with valuations just buy it and retire early.

[nate311]

@Randol33 if the goal is to sell any asset at a higher price at a later time, overpaying makes that increasingly difficult. no asset should ever be bought at any price or as buffett says, "whether stocks or socks, i want to buy them on sale."

[crusmon6]

WARNING isn't even close to the right word for your title! You probably know that as well. Lowered expectations, maybe. Warning not even close!

[ocbearclaw]

All the bears told me that Apple is worth $60-90 a share.... huh

[Tarheeboy9712]

Someone that spends that much time pointing out nothing must have an agenda. The question isn’t that complicated.

[vicwinkler]

@Tarheeboy9712 You think the author isn't pointing out anything, and yet it is pretty clear to me that the point of the article was to survey the issues that are relevant to a discussion of APPL stock price ...and he did a pretty good job of that. If you are looking for a simple answer like "GREEN" versus "RED" or "invest" versus "don't" you might be a superficial investor ;-)

[Livy Investment Research]

@vicwinkler Thank you for your comment and appreciate the support. I hope you’ve found the article helpful!

[vicwinkler]

@Livy Investment Research You are welcome. It seems the comment section is a place where some come to vent —or groundlessly speculate— in public.

[NowRetired2021]

Maybe I missed it, but what is your time frame for the target price?

[Livy Investment Research]

@NotYetRetired Thank you for the comment!

$170 is our 12-month price target and is updated on a moving basis based on any material information made available on Apple, including periodic earnings releases and/or news related to transactions and securities offerings.

[NowRetired2021]

@Livy Investment Research thank you. I willing to bet that AAPL hits $170 well before that.

Yes, I’m a fanboy, but AAPL has been very good for me. I started buying about 30 years ago and have kept accumulating. I don’t wait for dips. I just buy when the cash is available like in a week or so when the AAPL dividends are paid.

[cachinga]

Could the penny pinchers at Apple squeeze out a bit more dividend since they are doing so well?

[Livy Investment Research]

@cachinga Thank you for your comment!

Although Apple’s dividends may seem low compared to its cash balance, its total cash returned to shareholders including share repurchases was more than $20 billion during the June quarter, which represents almost 20% of its TTM EBITDA. This compares to industry peer Microsoft’s $10.4 billion returned in the most recent quarter, which represents a little under 13% of its TTM EBITDA, making Apple’s payout quite attractive for a growth tech company.

[atdh1]

@cachinga I'd prefer they continue their massive buybacks so I won't have to pay taxes on dividend payments.

[cachinga]

@atdh1 I'm in it for income, rarely share price but after awhile really their dividend is too low for such touted stock..

[Appleguy58]

What ever the earning announcements are Apple 🍎 is always a buy after any pull back.Long,Buy & hold.Where can you go out and buy a company of this magnitude for $145 ish 🤷🏼‍♂️🤷🏼‍♂️

[owens7301]

Pretty simple decision re Apple stock: buy and hold. Next 6 months should realize seasonal gains for Apple globally! It is a beast of a company and it’s products are desired by the consumers across the globe.

[InvestInMETA]

AAPL is a buy and hold, always and forever. Anyone who says different is not worth taking financial advice from.

[Livy Investment Research]

@jgoldston0 Thank you for your comment!

Apple is definitely a strong pick for those looking for a reliable and profitable long-term investment to add to their portfolios considering their robust liquidity, and continued ability to generate demand and sales growth through innovation.

[cwsdist.pf]

@jgoldston0 nothing is forever but Apple is close!

[SEC Investigator2]

Your valuation is almost spot on as my valuation. It is so spot on I thought I wrote it.

[Damoni Kennard]

@SEC Investigator2 Dear sir I'm shocked. You're not bashing the Apple CEO or CFO in this comment? What happened, are you ok?

[SEC Investigator2]

@Damoni Kennard
Trust me, Apple would be a much better company without Cook and his hand puppet Luca. Luca probably is the worst CFO in the industry.

[sanberdoo]

@SEC Investigator2 The real question is: Who can do more damage to a company, its CEO or its CFO? Bad CFOs earn their outsized salaries simply by looking for loopholes and playing games with numbers. But just consider the likes of Bernie Ebbers, Ken Lay, and Jeff Immelt (among others). Thus, when I find myself preparing for a year-end portfolio tax-loss, I find that nothing beats an incompetent CEO.

[skeeter721]

I own too much of apple and won’t to lighten a little, but keeps making me lots of dough

[Appleguy58]

@skeeter721 always good to take some profits.Apples making me lots of Apple pies 🍎🥧🥧

[mako26]

@skeeter721 right ??/ I as well .. I'm pulling some cash together to buy some NXPI and XLV. but not from apple ..Waiting for fall rally to sell my Jan 2022 $140 calls up %90 .. I own the stock and other calls 1 and 2 years out ..but it's tough to sell apple

[Buyandhold 2012]

Apple is now a HOLD.

[wdchil]

@Buyandhold 2012 Agreed! WD

[bart_sst]

@Buyandhold 2012 : Yep, it's a buy and hold just like your name says.