- Apple Inc. and AAPL stock will benefit from last quarter sales and seasonality as it is the holiday season.
- The stock has beaten analyst estimates in 4 out of the last 5 earnings reports.
- AAPL stock has a strong 12 month EPS consensus estimate and is oversold at current levels.
Apple Inc. (NSDQ:AAPL) has recently seen a big sell-off, falling from $118 per share to under $108 per share in less than 20 days before rising back to $110+. This could be a buying opportunity based on 3 major factors. Apple stock is under serious selling pressure and the stock hit a low of $104.08 per share on November 14, closing over 2.5% lower compared to the previous day. So what could be some important reasons to consider buying Apple stock again? The company will benefit from strong last quarter sales and seasonality as it is the holiday season, which is historically a strong quarter for Apple.
Relative Valuation Analysis:
|Important Financial Ratios||Apple||Industry|
Seasonality is a strong factor to consider
The first factor is seasonality. As Christmas holidays approach, strong demand for several of the company’s products such as iPads, new and improved iMacs and naturally iPhone 7 series can add both strong revenue and profitability or increased earnings per share for the first quarter of fiscal year 2017. The company, for the last five years, has positive cash flows from operating activities and also strong free cash flow, and for the last two years, the last quarter of the calendar year has shown an increase in earnings per share compared to the previous quarter. (See also: Trump Fears Didn't Drag Apple Inc Stock, This Did)
Consistent EPS Surprises
Apple has also reported earnings surprises in 4 out of the last 5 earnings reports. This shows a consistent trend and there are high chances that the first quarter of year 2017 will be a strong earnings surprise as well, due to the seasonality factor mentioned above.
Strong EPS growth for next year
The stock also has strong EPS consensus estimates with analysts expecting its earnings per share to grow at about 9.56% for the next 3-5 years. However, there are a few alarming and negative results that can explain the recent sell-off in the stock price. One factor which is not to be ignored is that a potential tariff on Chinese products which the new president-elect has talked about could harm sales of Apple as the company assembles majority of its iPhones in China. Any restriction in free trade could have a negative impact on Apple in terms of global sales. This is a very high risk, but for time being it is just a thought, not a fact.
The most apparent factor that has caused Apple stock price to decline recently is the slowdown in sales, earnings per share and contraction of gross and net profit margins this fiscal year in comparison to last year. This slowdown in revenues, earnings per share and margins this year show that maybe Apple will face slowing growth rates in the future as compared to the previous years. (See also: Is Apple Inc. (AAPL) Stock Still A Great Buy?)
But when we analyze the overall financial performance of Apple and compare it to the Electronic Equipment industry we notice that Apple has a lower P/E ratio, and higher net profit margin and return on equity ratios than its industry. Financial strength is very good with both current and quick ratios above 1 while both long-term debt to equity and total debt to equity ratios are below 1.
Finally, technical analysis shows that momentum indicators such as MACD and full stochastics are deeply oversold at current levels so a move to recent highs of about $130 per share with a tight stop loss if the selling pressure does not stop, provides a good risk adjusted trade opportunity. The key support level of $100 per share is very important.
Apple stock at current levels of about $105 per share, provides a good trade opportunity as the stock appears not very expensive in relation to its industry and though a decelerating growth in sales, earnings per share and profit margins are alarming, the stock still has very strong fundamentals. If the company can deliver strong sales during Christmas, then chances of the share price moving to retest former resistance of $130 is very likely. If we add the possibility of a Santa Claus rally, which could happen near the end of this year and start of new year, then investing in Apple at current levels could be a low risk investing idea.
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