Buy Apple (AAPL) On The Dip Because We’re Going Back Up

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

Stock: Apple (NASDAQ: AAPL)

Stock Rating: BUY

Price Target: N/A

Market Price: $116.03

Research Publication Date: 11/25/20

Time to buy Apple (AAPL) stock? We think so. The fundamental backdrop heading into the release of the first 5G iPhone hasn’t been as rosy given the weakened economic environment due to the absence of stimulus payments, but it doesn’t change the fact that this year’s line-up is the best we’ve seen in a number of years.

We anticipate that iPhone refresh will be significant, as the design of the iPhone 12 reminds us of the iPhone 5S but just bigger and better with much beefier components. For those who remember how popular iPhone 5 and 5S was… we can only imagine the iPhone 12 toppling expectations on unit sales given the reintroduction of a design that caters to iPhone loyalists at a time when Apple needed to deliver the most.

If design is not a compelling enough reason, we anticipate that 5G could also bring customers back despite the gloomy outlook heading into the holiday season. Consensus estimates suggests revenue of $101.88B for Q4’20 vs. Q4’19 sales of $88.5B. Some pundits believe expectations have gotten so elevated to the point where a sales miss is in the cards… and the price could drop. However, we think demand will likely surprise on consumer hardware given the softened expectations tied to last quarter’s quarterly miss, and the absence of quarterly revenue guidance (which we will discuss further in the next section).

Source: Google Finance

What about expectations?

We anticipate that Apple’s stock is mostly consolidating into a tight trading range on the condition that the company is able to deliver above expectations in the upcoming quarter. Bears may suggest that expectations seem too elevated. But, with refresh likely suggesting hardware revenue growth, and software/services revenue continuing to grow at a steady pace, its unlikely that an expectation miss will create an opportunity to buy Apple stock at an even cheaper price.

Luca Maestri (CFO of Apple):

Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October.

So, coming out of last quarter, analysts were given every reason not to make aggressive sales estimates. The key for shareholders heading into the next year isn’t profitability, but the topline revenue figure, which is why the release of this year’s 5G iPhone hasn’t translated to an expectation lift, and as such we’re positioned for one of the most unique holiday quarter’s we’ve seen in a while.

Analyst estimates will be based purely on financial models absent of any internal data provided by Apple’s management. This gives analysts like us every reason to make conservative estimates on both hardware and software revenue. Therefore, its more likely that Apple’s decision to not report outlook is precisely why they will end up beating on revenue and earnings estimates.

Particularly revenue growth of 15% y/y sounds borderline crazy when compared to other points in iPhone’s history, but we genuinely believe that this year’s iPhone can actually carry the company and diminish some of the dependency on software/services we’ve seen in the past several years.

Furthermore, we think the recent pullback to $110-$115 creates a compelling re-entry point before analysts come back with early channel check data. Meaning that prior to analysts revising up on strengthening data points within the supply chain, the recent pullback creates an opportunity to buy the dip just one more time before the stock starts recovering and starts pushing $130-$150.

Disclosure: Cho Research was not compensated by Apple to publish “Buy Apple (AAPL) On The Dip Because We’re Going Back Up Though Cho Research does use the research dollars it generates from other clients of our research service to fund market research
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