Apple earnings preview: Can services double again?
Apple’s services segment had a strong fiscal 2020, and the holiday quarter is unlikely to be any different. Revenues increased 16% (see graph below), driven by favorable stay-at-home trends.
First test for Apple One
This will be the first quarter in which the success of Apple One will be tested. I suspect that the results will be satisfactory, to say the least.
The bundles may be Apple’s solution to soft demand for some of its less popular and recently launched services., which include News+, Arcade and Fitness+. This would be in line with my original take on Apple One:
“Apple’s One service bundle is all about nudging users to not only sign up for services that most want (Music, iCloud), but also for those that most people rarely think about (News+, Arcade). In my view, this could be the solution to the lack of traction problem seen in parts of Apple’s services offerings.”
Why Jim Cramer likes Apple here
On Friday, ahead of the Martin Luther King Jr. holiday, The Street’s Jim Cramer weighed in on Apple. He briefly argued that the stock was a “terrific buy” at current prices.
Supporting his position are the following couple of factors:
- Demand from China is much better than previously thought, including in Mac and Services.
- Shares are down about $10 from the late December peak, offering some value to newcomers.
China is looking great
Jim Cramer is probably right about the China opportunity in the holiday quarter.
Third party data suggests that Apple accounted for over 20% of smartphones sold in the country in the fourth calendar quarter. This is an impressive number, considering how domestic players tend to dominate this market.
Is cheaper “cheap enough”?
On the second point, Jim Cramer is also right: Apple is now cheaper than it was a mere three weeks ago. But whether “cheaper” is “cheap enough” is another question altogether.
Keep in mind that Apple stock has been up 63% in the past year and 424% in the past five. From this perspective, shares are now far from discounted.
On December 29, exactly when the stock reached its recent all-time high, the Apple Maven published a quick study on Apple’s valuation. The data suggested overvaluation back then.
Price-earnings ratio of about 42 times was substantially higher than during any other period prior to 2020. Relative to the S&P 500’s P/E multiple, Apple’s valuation premium was the widest that it has been since 2012 at least.
Microsoft earnings review: What will matter most
The Apple Maven looks around the FAAMG group to preview Microsoft’s earnings report. Expect the company to beat consensus, as usual, supported by cloud and personal computing.
What Wall Street expects
First, let’s take a peek at what analysts have been saying about Microsoft. According to Stock Rover, the consensus opinion is that Microsoft is a strong buy, with virtually all research shops agreeing on the bullish rating (see chart below).
Median price target on the stock is currently $249 per share. At these levels, Microsoft would have 17% upside potential.
The Apple Maven’s view
Microsoft is known for promising little and delivering well beyond its outlook. The last time that the company failed to beat consensus estimate on earnings was all the way back in early 2016. Therefore, do not be surprised to see another better-than-expected set of numbers this time.
Apple stock: What analysts are saying ahead of earnings
Apple’s earnings day is fast approaching. Ahead of it, Wall Street has been weighing in on the company’s fundamentals and the stock. Not all opinions, however, have been bullish.
The last few research notes coming from Wall Street have been mostly upbeat about Apple’s prospects in the new year. RBC Capital’s Robert Muller was the most recent one to reiterate his buy on the stock and his price target of $145 per share.
Even better than that, a couple of experts have raised their targets on Apple ahead of earnings. This was the case of Loop Capital analyst Ananda Baruah, whose fair value estimate increased from $131 to $155 apiece, pointing at 20% upside opportunity on the back of “a really big year” for the iPhone and Mac.
Barclay’s Tim Long bumped his target price to $116 per share from $110, but kept his equal-weight recommendation.
… but a word of caution
The bearish warning of the week was sounded by Goldman Sachs analyst Rod Hall. He holds one of the few sell ratings on Apple, with a price target of $85 suggesting about 35% downside risk.
Mr. Hall’s main concern lies with the iPhone. Rather than a “super cycle”, he believes that 2021 will bring about a typical redesign cycle. He sees the replacement rate in decline, and thinks that the negative trends will persist throughout the year.
Apple’s AR and VR devices: The next big thing?
The rumor mill is churning once again, with Apple’s new VR and AR devices speculated to hit the market in the next few years. Will they be the Cupertino company’s next big thing?
What are we looking at?
According to Bloomberg, “Apple is planning to launch an expensive, niche virtual reality headset ahead of its widely rumored AR smart glasses. The first version will be so expensive that each Apple Store might only sell one each day”.
Apple’s wearable device would not be novel the same way that the iPhone was a pioneer in the smartphone category. Currently, the likes of HTC, Sony and Facebook already compete in the VR space with devices like the Oculus.
The Apple Maven’s opinion
I am less enthusiastic about another VR headset hitting the market than I am about an “Apple Glass” being launched sometime soon.
I believe, however, that the first company to go to market with a competitive product that combines quality and accessibility will have a huge advantage in the consumer IT hardware industry for the next five to ten years, at least.
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(Disclaimers: 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)