Apple Inc. (AAPL) will report earnings on April 30. Many investors, both existing Apple shareholders and the ones who are waiting on the sidelines for an opportunity to invest, are eagerly waiting for an update from the company about its prospects in this challenging environment.
As often is the case, I believe there’s a very real possibility of Apple shares following the direction that would be painted by the company executives, rather than the real earnings of the company. For more than a couple of years, this has been good for Apple and its market value. Even though the net income of the company failed to grow meaningfully throughout the last 5 years, Mr. Market kept on rewarding investors as a result of the growth in EPS that was fueled by the significant decline in the share count resulting from billion-dollar buybacks. The optimistic view painted by Tim Cook and co. was also behind the massive run-up of the Apple share price since 2018. But, this time around, things could turn out to be very different.
Global smartphone shipments were already declining. This is nothing new. But, the outbreak of Covid-19 will make it even more difficult for the industry to grow. The silver lining, as far as many investors are concerned, is the expected launch of 5G-enabled Apple devices later this year. And here comes the bombshell. The Wall Street Journal reported a few hours back that Apple has delayed the mass production of its 5G-enabled iPhone devices. This is not an indication that the September event will be canceled. But, it’s an early indication that Apple might slash its sales projections when the company reports earnings on April 30. Needless to say, investors won’t take this in stride.
There’s more to the story. In the upcoming earnings conference call, I expect executives to use “if” much more than they have ever done. As a mature company, Apple always knew what it was going to do. Or so we thought. This is going to change on April 30. Not even the smartest epidemiologists have an idea about what to expect in the coming months, so being hopeful of Tim Cook coming up with a plan to combat the expected decline in device sales is irrational. This uncertainty will likely lead to negative sentiment toward Apple shares.
Even though I’m not bearish about Apple’s very long-term prospects, this doesn’t seem to be the right time to bet on Apple. There are supply-chain problems. The services segment does not account for the bulk of the company revenue either. In any case, the growth of this segment will depend on the growth of the installed base (the number of Apple devices in use globally). Apple Tv+ is in an uphill battle to gain traction whereas Disney+ is growing in leaps and bounces. The future for Apple, as far as I see, is much more uncertain than it used to be. But, shares are trading at 5-year high earnings multiples. Now that’s what you call an anomaly between the economic reality of a company and its market value.
There is, however, a possibility of an increase in the dividend. This would be the only saving grace for Apple shares when earnings are reported on April 30.
Stay tuned for the post-earnings analysis of Apple.
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