Why Apple Stock Needs to Report a Good Number

iStock.com/Jaroslav Frank

Market Looks to Apple for Assurance

Mark November 1 on your calendar. Not because we will be closing off a horrific October for stocks that saw the Nasdaq and Russell 2000 indices plummet into correction territory, but it’s the day trillion-dollar behemoth Apple Inc. (NASDAQ:AAPL) reports.

The numbers better be fairly good since AAPL stock has largely avoided the stock market carnage that has inflicted the rest of the FAANG group, consisting of Facebook, Inc. (NASDAQ:FB); Apple; Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX); and Alphabet Inc (NASDAQ:GOOG).

The market appears confident since Apple stock is only off about 6.85% from its high as of October 26 and is easily outperforming the Nasdaq on both a year-to-date and one-year basis.

For investors, it is amazing that a company that relies heavily on one product (the “iPhone”) continues to defy market expectations and deliver great results.

When famed value investor Warren Buffett made Apple stock the No. 1 holding in the Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) fund, you realize the faith in AAPL stock.

Just when you think people don’t want to spend over $1,000 on an iPhone, Apple comes out with results that prove they do.

The fiscal fourth quarter and fiscal year 2018 will be closely watched for not only the early results from the Apple “iPhone X series,” but also the company’s forward guidance, in particular to the situation in China. Remember that Apple managed to get a tariff exemption.

There have been signs of slowing in the critical Chinese market, so it will be interesting to see the geographical breakdown in Apple’s results.

The consensus calls for Apple to report an adjusted $2.78 per diluted share in the fiscal fourth quarter, up from $2.07 per diluted share a year earlier. Revenues in the quarter are pegged at $61.59 billion, up 17% year-over-year.

For fiscal 2018, Apple is estimated to earn $11.79 per diluted share on revenue growth of 15.2% to $264.04 billion. (Source: “Apple Inc. (AAPL),” Yahoo! Finance, last accessed October 26, 2018.)

In my view, it is unclear if Apple needs to beat this amount, but given the current nervous climate for technology stocks, it would be a safe bet.

The reality is that Apple has only beaten the consensus in three of the past 15 quarters, and yet has still managed to see its share price appreciate.

In addition, what Apple says about China and tariffs will be critical.

While the iPhone is exempt from tariffs, there are many components in the phone (many are U.S. parts) subject to tariffs, so watch the margins.

Below is the Apple stock long-term trend, which has remained on track since 2002:

Chart courtesy of StockCharts.com

The chart shows AAPL stock trading at just below its 50-day moving average, with some minor support at $215.00, as the market decides what to do next.

A soft report could see Apple stock retest downside support at $195.00 to $200.00, with $180.00 as a major support level.

The options market is betting on a potential move of around $7.00, or 3.2%, to around $225.00.

Analyst Take

Apple stock is not expensive, trading at roughly 15.8 times its full-year 2019 earnings per share. But for it to break higher, we need help from the results and the market.

The way I see it is that any major weakness in Apple stock down to $80.00 to $200.00 opens up an opportunity. Of course, we are assuming the fundamentals remain strong.