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Buy Apple Stock Despite Hiccups in Its Fourth Quarter

InvestorPlace logo InvestorPlace 11/3/2020 Muslim Farooque
a group of people standing around a luggage carousel at an airport: Apple (AAPL) logo on an Apple store in Santa Monica, California. © Source: View Apart / Shutterstock.com Apple (AAPL) logo on an Apple store in Santa Monica, California.

Apple (NASDAQ: AAPL) reported its much-awaited fourth-quarter earnings on “Super Thursday,” Oct. 29. The tech giant delivered a mild earnings beat, but some of its results came in lower than last year. As a result, AAPL stock was down almost 4% in after-hours trading that day. However, with the upcoming release of the iPhone 12 and other products in its 5G lineup, expect AAPL stock to gain plenty in the coming months.

Apple (AAPL) logo on an Apple store in Santa Monica, California. © Provided by InvestorPlace Apple (AAPL) logo on an Apple store in Santa Monica, California.

The relatively weak iPhone sales during the fourth quarter were primarily to blame for the underwhelming results. The delayed release of the iPhone 12 in China led to a 29% drop in sales in the country. However, it has had little impact on Chinese consumer interest in the phone, with healthy preorder numbers so far. The release of the iPhone 12 mini and iPhone 12 Pro Max in mid-November will boost sales during the holiday season and beyond.

An Underwhelming Fourth Quarter

Apple has had a solid track record of earnings with four positive surprises in the last four quarters. The company beat analyst estimates again this quarter, though by a relatively small margin. Apple posted revenues of $64.7 billion compared to estimates of $63.7 billion. Moreover, earnings per share were at 73 cents, beating estimates of 70 cents. Though revenues improved 1% year-over-year, profits declined 7.5%.

“Apple capped off a fiscal year defined by innovation in the face of adversity with a September quarter record, led by all-time records for Mac and Services,” stated CEO Tim Cook. Naturally, the results were weighed down by the delays in the release of the iPhone 12. The table below shows a breakdown of revenues by product in the fourth quarters of 2020 and 2019.

table: AAPL Stock Q3 revenues by product © Provided by InvestorPlace AAPL Stock Q3 revenues by product Source: Muslim Farooque

From the table above, we can see that the revenues for most products have increased by double digits. The anomaly in the data is the iPhone sales, which dropped 21%. The iPhone 12 and iPhone 12 Pro became available in mid-October, well after Apple’s fourth quarter. Moreover, the iPhone 12 mini and iPhone 12 Pro Max are not available until mid-November.  Hence, the entire launch season of the latest iPhone will factor into the first quarter of 2021. However, these results include the 8th generation iPad, the 2020 iMac, and the Apple Watch Series 6.

The company has not provided any guidance for the upcoming quarter due to uncertainty caused by the global pandemic. Though the company has withheld its guidance, I expect a blow-out first quarter of 2021.

Promising Future Ahead

Despite the hiccups in the fourth quarter this year, Apple has a promising future ahead. A significant element of its success is the 5G upgrade cycle. Apple’s products and services will lead the 5G wave and help revive the mature smartphone market. According to recent reports, iPhone 12 sales are pegged at an impressive 80 million units by the end of this year.

Additionally, Apple’s services continue to expand, continually adding new products. It will be launching its “Apple One” bundle, which includes all of its core subscription services for a single monthly fee. The bundle costs $14.95 per month for a single plan and $5 more for the family plan. Apple One is likely to increase further revenues of its booming services division, which grew 16% quarter-over-quarter.

The product which grew the most in the quarter is the iPad. The company recently introduced an updated version of its entry-level iPad costing $329. Additionally, the new and improved version of the mid-tier version of the iPad Air was introduced, boasting a faster processor. Apple will also be introducing the first Mac computers that will use its own processor, marking a transition away from Intel. Mac sales have grown handsomely in the quarter. Moreover, with developments in VR and AR ahead, Apple’s wearables division will continue to grow at a healthy pace.

Final Word on AAPL Stock

Apple’s pedestrian fourth-quarter earnings have left investors unimpressed. However, the drop in earnings was mainly a result of the delays in the release of the iPhone 12.  Apart from weak iPhone sales, other product sales remained robust during the quarter. With several new product and service offerings coming in addition to the iPhone 12, expect a massive first quarter next year.

Moreover, the recent pullback in share price has created a buying opportunity for investors to grab this evergreen stock.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University. He does not directly own the securities mentioned above. 

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