As tempting as it often seems, buying a stock just before earnings season is rarely a great idea. If the report disappoints, the stock may not appear as attractive in the light of the new information, or, at the very least, will drop and be even better value after the event.
If, on the other hand, the company beats expectations or raises guidance you might miss out on an immediate pop, but a fundamental shift like that usually triggers a long-term move upwards. In the grand scheme of things, you risk a lot by wading in but don’t miss out on a lot by waiting.
As is true in so many different situations, however, Apple (AAPL) is an exception.
In the current atmosphere of negativity surrounding Apple it is easy to lose sight of just how successful they are. The were the most profitable company in the world last year for the third straight year and have a stash of cash that is bigger than the GDP of around three quarters of the countries in the world.
Despite that, AAPL consistently trades at a big discount to the average P/E for the S&P 500.
The reasons are oft stated and seem to make sense ... until you stop and think about what is actually being said. The first is usually that the global cellphone market is saturated. With around 90% of the world’s population forecast to own a mobile phone by the end of 2020 that is probably true, but the entire world also has things to drink, yet Coca-Cola (KO) still makes good money. The point is that Apple products are aspirational and with iPhones having a global market share well below 20% there is still plenty of room for growth.
That growth may be slower than it once was, which is the second most quoted reason for Apple’s low multiple, but really, why should that matter? If the stock consistently traded at Amazon (AMZN)-like multiples that imply massive growth it would be a problem, but at 12.5 times trailing earnings AAPL is hardly priced in expectation of high double-digit sales increases.
Even so, the critics deride them for not achieving what they have managed in the past. They are, in that sense, essentially victims of their own success.
That is not a new thing. I wrote this article in 2012, at another time when AAPL was falling out of bed, making exactly that point then. Looking back at that time, the arguments then as to why Apple had to be sold at the equivalent of around $70 are the same as they were a few months ago when it was at around $230: Global growth is not as fast as we would like, the latest iPhone is a little disappointing, how many people can really be expected to buy a mobile phone, the products are too expensive, yada, yada, yada. Those arguments led to some bad decisions then, and if you listen to them this time around the chances are the outcome will be the same.
This is not the first time expectations for Apple have been low and falling. The market view of the company has always been cyclical, and they have learned to live with that and just carry on making money regardless, beating those expectations as they go. Even now, when negativity reigns, a glance at the earnings history shows a solid year of EPS beats.
Of course, there is no guarantee that AAPL will do that again, especially as Tim Cook recently issued the first profit warning of the iPhone era, but the issues that prompted that are reversible and fully priced in. The trade war and resulting slowing of growth in China were the main issues cited, and talks on that front are continuing, with both sides extremely motivated to find a deal, and the stock is down over 35% from the October highs.
The letter to investors that gave that warning also pointed to strong growth in the services division in China and growing recurring revenue in the world’s largest company is a pretty good sign for the future.
Another beat would come as no surprise, but even without one, AAPL will reverse direction before long. That is why, even with earnings just a couple of weeks away, Apple is a buy right now.