Apple Earnings Indicate That There May Be More Pain Ahead

After being bullish on Apple (AAPL) throughout 2014 and for most part of 2015, I recently changed my stance and recommended investors to sell the stock when it was trading at roughly $120. I cited the imminent year-over-year decline in iPhone sales as the reason to sell the stock and Apple has fallen over 20% since then.

The fears regarding iPhone sales decline were confirmed yesterday as Apple shared its quarterly earnings report. Apple reported Q1 EPS of $3.28, beating the analysts’ estimate by $0.05.
The beat wasn’t impressive as it was primarily fueled by large buybacks.

However, on the revenue front, Apple reported a meager growth of 1.7% to $75.87 billion, missing the consensus target by $720 million. iPhone sales of 74.8 million was also marginally below the consensus estimates whereas iPads and Macs witnessed substantial decline in sales.

With sales falling, Apple expects the Q2 revenue to be in the range of $50 billion-$53 billion, considerably below the consensus of $55.6 billion and year-ago sales of $58 billion. To put into perspective, the mid-point of Apple’s guidance is still over 10% below year-ago sales.

In addition, gross margin is also expected to fall 1% in the upcoming quarter, whereas operating expenses are expected to increase considerably as well. All in all, the earnings report was bad and even though the stock is cheap, it can continue its downward trajectory.

I still like Apple’s business, however the company’s growth has slowed down significantly and the short-term headwinds can continue pushing the stock lower. Long-term investors should wait for a better-entry point as a strong U.S. dollar and headwinds in China will keep a lid on the stock price.

Apple’s stock may be dirt cheap, especially since the company has $39 per share in cash, but the slowdown in growth will keep the stock at current levels. The perception of growth is very important in the current market. This is the reason why companies like Amazon (AMZN) and Netflix (NFLX) command triple-digit P/E ratios, whereas the likes of Apple and Gilead Sciences (GILD) struggle.

Conclusion

The upcoming quarter will be a tough one for Apple and I expect the share price to fall to roughly $90 due to the slowdown in growth. Forex headwinds and slowing demand in China will have a negative impact on Apple’s shares in the short-term.  However, long-term investors should use the selloff as an opportunity as a successful launch of the next iPhone can accelerate Apple’s growth.
Published on Jan 27, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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