Hey Traders,
With earnings season in full gear, this week we are going to take a dive into the largest company in the world …
That’s right, we are digging into Apple (Ticker: AAPL)!
The company known for a phone seems borderline bulletproof whether the market goes up or down …
But is it?
Where does AAPL head from here now that it’s trading over $140 again and has earnings in 8 days?
Here is the way I see it.
The Positives for AAPL
AAPL has a lot of positives in its favor … the most important of which is its dominance in the phone market.
It’s the iPhone and then a bunch of also-rans…
The IOS system, which is on all its devices, is a cash machine for the company as it takes a significant cut out of every purchase made on their phones via the App store.
Their computer market is stable, although I would note that much of the demand for computers is on the high end – for mining or AI – not a strength for the Mac.
The company has a strong balance sheet. The stock produces $6.79 dollars of cash flow per share and more than $24 a share in revenue.
That cash flow of $6.79 per share converts into a healthy EPS of $6.10. As a raw number that is a big figure.
Long story short, AAPL has great margins and makes a lot of money. That is the reason the stock is so widely held.
And it’s the largest component of the SPX and NDX, meaning it has to be held by every ETF, mutual fund or Money Manager using those as a benchmark.
It is also a popular name with institutions that are not targeting those indexes, family offices, and retail investors.
It is a great place for investors to park money because it pays a dividend and has up to this point been bullet proof for the most part…
Which is what leads us to the downside of AAPL.
Downside for AAPL
Where is the growth?
The phone market is saturated. There is only so much more business AAPL can take from Android.
And the phones themselves seem to be peeking in terms of how much better the next generation phone is than the previous:
The stall is starting to show up in earnings…
Trailing 12 months EPS seems to have flattened …
Sans a blowout Q4 in 2021, quarterly EPS is actually falling:
Thus the growth has to come from services. I brought this up last week: did you see Salesforce (Ticker: CRM)?
AAPL has an EPS around $23. That means it is pricing in some serious growth that would need to come from services – or potentially a car.
Services seems the more likely candidate. But in the near term, software services are for the most part in decline…
So what has been holding the stock up? How wildly it is held.
But what happens if AAPL has a really bad quarter on Feb. 2?
Its recent high is 182.01, meaning the stock is off about 40 bucks in just over a year … good for a 22.47% drop.
It is down less than MSFT even.
If this thing falls anywhere near the way CRM dropped – let’s be conservative and say 50% of the low to high – that would mean it should drop about 30-35% … which would put it at 127.40, near its recent low.
If it drops 40% from the high, we are now looking at $109.
This quarter and outlook need to be good or there could be a rush for the exit here and into other parts of the market. Or into cash.
The good news is, if it gets to $105-$110, the EPS will be back to about 15ish, which is appropriate and it would be a great buy.
Your Only Option,
Mark Sebastian