Apple Stock: 3 Reasons to Be Bullish on Apple Inc.

Apple StockApple Stock Up After June Earnings Report

Apple Inc. (NASDAQ:AAPL) stock is up sharply after the company posted its June quarter results that exceeded Wall Street’s average expectations. Before the earnings release, however, Apple stock price had been down approximately 22%. The stock is still down nearly 15% over the past year, which may offer an attractive entry point for bargain hunters eyeing Apple shares.

Apple Inc.’s June quarter reflected the sentiment that many Wall Street analysts have held for the stock in recent times. There have been mentions of AAPL stock’s best times being behind it and results for the June quarter showed that Apple’s services business is expanding at an attractive rate, despite the slump in overall performance from the year-ago quarter. In fact, when it comes to Apple’s services business, Apple CEO Tim Cook believes it could be a Fortune 100 company by next year if it were a standalone company. (Source: “Apple Earnings Fall on iPhone Slump,” The Wall Street Journal, July 26, 2016.)

Apple Stock Beats Consensus

Apple Inc. posted earnings that topped expectations, indicating that Wall Street is failing to accurately predict the company’s future and offering a reason for value investors to hold on to their Apple stock.

Apple reported earnings per share (EPS) of $1.42 at a time when Wall Street was expecting EPS of $1.38. Revenue of $42.36 billion exceeded the consensus estimate of $42.1 billion.

In terms of unit sales, Apple sold 40.5 million “iPhones” in the June quarter, better than the 40 million units Wall Street predicted. Meanwhile, “iPad” revenue rose seven percent in the June quarter, despite continued pressure in the tablet market.

Besides products, sales of Apple’s services are doing well. In the June quarter, Apple posted a 19% uptick in services revenue to $5.98 billion. Most of that came from selling apps, fees from supporting “Apple Pay” transactions, and subscription to “Apple Music.”

Potentially Strong iPhone 7 Demand

Investors are currently pricing in tepid demand for the upcoming “iPhone 7.” They believe that limited form factor change won’t inspire robust uptake of the product. There is also the belief that since Apple is likely to make a major product design shift in 2017, many of its customers might want to delay their purchases until next year.

But fears of tepid iPhone 7 sales appear overdone. Those thoughts seem to discount carrier support in iPhone sales. Looking at the huge upgrade to the “iPhone 6” and assuming that carriers locked in those subscribers with two-year contracts, those contracts should be coming to the end of their lives in the December quarter.

With that, carriers will be putting their best foot forward to ensure that they don’t lose iPhone 6 upgraders and that should translate into massive promotional campaigns to drive up demand for the iPhone 7.

Though the issue of equipment installment plans (EIPs) as a possible reason to upgrade to the iPhone 7 may not be as robust as the upgrade to the iPhone 6, it’s easy to realize that only a small percentage of subscribers across the carriers have embraced EIPs.

Besides the carrier support, Apple’s own “iPhone Upgrade Program” offers incentive for strong iPhone 7 uptake. Given the large number of subscribers who are eligible to upgrade, there is a fair chance that iPhone 7 adoption could outpace that of both the “iPhone 5S” and the “iPhone 6S.”

Apple Inc. Meets Margin Target

While the issue of limited form factor change in the iPhone 7 relative to the iPhone 6 is a cause for concern in terms of demand, it could actually save Apple a ton of money and ensure that gross margins aren’t seriously eroded. Don’t forget that major form factor changes have been a reason Apple has posted significant gross margin declines in the past product upgrade cycles. As such, a minimal form factor upgrade in iPhone 7 should help protect gross margins, especially considering that the “iPhone SE” is already a gross margin destroyer.

The average selling price of the iPhone was $595.00 in the latest quarter compared to $662.00 in the year-ago quarter. The lower-cost iPhone SE was responsible for the decline in the average iPhone selling price. Still, Apple met its margin target, with gross margin coming in at 38.0% compared to the internal guidance in the range of 37.5% to 38.0%.

The Takeaway Regarding Apple Stock

The compelling growth of Apple’s services business, the company’s continued push into the enterprise market, and its recent earnings beat provide incentive for Apple stock to soar further.