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Can Apple Stock Shake Off Post-Earnings Softness This Week?

Apple stock dipped after earnings day, despite the company’s jaw-dropping fiscal second quarter performance. Here is what investors can expect of the stock this week.

Apple delivered an astonishing set of fiscal second quarter numbers on April 28. Yet, the stock reacted as if none of it had happened. Shares dipped 2% last week, most of it after the company’s historical earnings day.

Investors must be scratching their heads and asking: will Apple stock shake off post-earnings bearishness? While markets can be quite unpredictable, today the Apple Maven tries to address this tough question.

Figure 1: Apple's CEO Tim Cook during Spring Loaded event.

Figure 1: Apple's CEO Tim Cook during Spring Loaded event.

Is growth sustainable?

To understand what may happen to Apple stock next, it helps to recap why shares spun their wheels to begin with. Afterall, outstanding fiscal second results do not seem to justify muted share price performance.

Apple’s revenue and EPS beats (i.e. performance above consensus) of $12.3 billion and $0.41, respectively, were the widest ever. Also, the company provided partial guidance for fiscal third quarter that points at another positive surprise relative to expectations.

Nothing seems to be wrong with Apple’s business today or in the near future. But investors seem to have looked forward a bit: what will happen to Apple’s financial performance, once the pandemic-driven “stay at home” tailwinds dissipate? Will the iPad and Mac continue to produce growth rates of over 70%, for example? The answer, in my view, is clearly not.

Fiscal 2Q21 Rev growth by segment.

Figure 2: Fiscal 2Q21 Rev growth by segment.

It is likely for fear of what’s next and what Apple’s P&L might look like in a post-COVID environment that shares of the Cupertino company have sold off during earnings week. Morgan Stanley’s Katy Huberty asked a question, during the earning call, that summarizes investor sentiment well:

“This was a pretty unbelievable quarter, and investors are going to ask about the sustainability of current demand trends, especially as you lap some of the benefits from COVID […]. Which segments do you see the opportunity to maintain strong revenue growth versus where is it reasonable to assume there will be some digestion as consumers shift their spending priorities?“

Then, of course, there is the simple fact that Apple stock climbed fast in the seven weeks that preceded earnings day, from a March 2021 bottom of $116 apiece to a peak of $135. Maybe the market just needs some room to breathe and consolidate. The Apple Maven spoke about this on Twitter:

The answer might be “give it time”

It is hard to predict market behavior, especially in the short term. Therefore, do not bet the farm that Apple stock will rebound this week, although an imminent recovery is not out of question.

But extend the time horizon from a week to several months, and I believe that Apple shares will eventually find their way north once again. The key driver of bullishness, in my view, will be a realization that Apple stock now trades at much more de-risked valuation multiples that resemble pre-pandemic levels.

The chart below shows trailing P/E over the past five years. A multiple at about 32 times is still rich relative to the pre-COVID 23 times. But as consensus 2021 earnings continue to adjust for fiscal second and third quarter results, this number is projected to drop in the next few months, assuming no change to the stock price.

Figure 3: Historical valuation multiples chart.

Figure 3: Historical valuation multiples chart.

The math is pretty straight forward, as I have recently explained: Apple was expected to deliver fiscal 2021 EPS of $4.45 before April 28. With the massive earnings beat of 42 cents and upside guidance for fiscal Q3 that I think will lead to at least 20 more cents of positive surprise, Apple should be on track to deliver at least $5.10 in EPS this year, likely more.

At Apple stock’s current price of about $132 per share, the new EPS target suggests a P/E ratio of roughly 25 times, if not lower. Considering Apple’s robust fundamentals, I believe investors will eventually see the value proposition in owning the stock.

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

This article has only scratched the surface. Alpha Spread’s extensive, user-friendly platform allows users to estimate a stock’s fair value – whether through valuation multiples, discounted cash flow, and more. I believe that the service is a must for anyone looking to own the right stock at the right price.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)