Why You Should Buy AAPL Stock Despite the iPhone Sales "Slump"

Wall Street was wringing its hands over Apple's Q1 earnings, which means it's time to buy AAPL stock.

Most analysts were unhappy with the 1% drop in iPhone unit sales from last year's December quarter, as well as Apple Inc.'s (Nasdaq: AAPL) lower-than-expected guidance for the current quarter.

Apple

Even before the overall stock market tanked this week, AAPL stock was backpedaling. Since the company reported earnings after the market close Thursday, Apple stock is down 4.75% to about $160.

But Apple actually had an outstanding quarter. The tech giant's prospects for 2018 suggest the AAPL stock price will hit $200 in one year's time.

What is Wall Street getting wrong here? So much it boggles the mind...

Apple's Q1 Earnings Are Better Than You Were Told

Let's start with that 1% drop in iPhone unit sales. Since the iPhone is responsible for about 70% of Apple's revenue, it is understandably a focal point for Wall Street.

While Apple sold fewer iPhones in the last three months of 2017 than it did in 2016, revenue from the device rose 13% year over year. That may seem odd, but you can thank the $999 starting price of the iPhone X.

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The pricey new models raised the average selling price of the iPhone segment from $695 to $796. Apple apparently sold quite a few of the iPhone X despite a lot of hand-wringing last fall by analysts complaining it was too expensive.

According to research firm Canalys, Apple sold 29 million iPhone X units in the December quarter, about 37.5% of the 77.3 million total. That's pretty impressive for a device that went on sale Nov. 1 - one month into the quarter.

But there's another, even more critical fact that Wall Street overlooked...

In the earnings conference call, CEO Tim Cook and CFO Lucas Maestri stressed that all of Apple's year-over-year numbers were better than they appeared because the 2016 Q1 included one more week of sales.

When you're Apple, that one week makes a huge difference, particularly in its Q1 - Apple's biggest of the year. One week of Q1 revenue works out to $6.79 billion, while one week of profits amounts to $1.5 billion.

To help the analysts out, Cook and Maestri gave average weekly sales for different categories to compensate for the one-week discrepancy. It allows for more of an, ahem, "apples to apples" comparison. Using that metric, iPhone sales did not fall, but were actually up 6%.

The average weekly numbers reveal that Apple's Q1 was better than reported in every category...

Apple Is Hitting on All Cylinders Now

Revenue was reported as up a respectable 13% year over year. But average revenue per week was up 21%.

Mac sales, which were reported as down 5% for the quarter, were up 2% when measured in average sales per week. Sales of the iPad were reported as up 6%, but rose 8% in terms of average sales per week.

Apple's fast-growing services segment had reported growth of 18% year over year, but that balloons to 27% when measured by average sales per week.

According to Maestri, revenue from wearables (which includes the Apple Watch, the new wireless AirPods, and Beats headphones) soared nearly 70% year over year - even without adjusting for one less week of sales.

In terms of earnings, Apple reported a 16% increase to $3.89 per share. That's also without adjusting for the shorter period.

As for guidance, Wall Street fell in love with its own lofty expectations. The forecasts were for revenue of $65.7 billion in the March quarter, while Apple provided guidance for $60 billion to $62 billion.

That does seem disappointing until you realize that Apple's revenue in the March quarter last year was $52.9 billion. If Apple makes the low end of its guidance, that's a solid 13.42% year-over-year increase. If it makes the high end, you're talking about a 17.2% increase for a company with annual revenue of $230 billion.

Seems pretty impressive to me, particularly when you factor in Apple's 38% gross margins.

Looking forward, Apple is set up to have a very strong year. That's why I'm giving readers my Apple stock price target for February 2019...

Why It's Not Too Late to Buy AAPL Stock

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For February 2019, I have an Apple stock price target of $200.

For 2018, the biggest difference-maker for Apple will be the changes in the federal tax code.

Maestri said the dramatically lower corporate tax rates on foreign profits will allow Apple to repatriate the $269 billion it holds overseas and continue to bring home foreign profits as it earns them.

This frees up about $163 billion immediately, which Apple can use to buy back stocks, raise its dividend, invest in research and development, or apply toward strategic acquisitions. All of those benefit shareholders.

Of course, the iPhone X will play a big part in Apple's 2018 success as well.

While analysts attacked Apple for iPhone X's high price, they're missing the strategic value of offering such a device with such consumer allure at a premium price. This is Apple's answer to the saturated smartphone market, which, according to research firm IDC, shrank in 2017 for the first time.

Apple's share of global smartphone sales hovers around 15%, but its share of global smartphone profits is about 75%. The iPhone X, with its focus on next-generation technologies like augmented reality, is aimed at securing Apple's dominance of the lucrative high end of the smartphone market.

Another avenue of growth is selling more services to its customer base. Cook made a point to mention in Thursday's conference call that Apple's active installed base had reached 1.3 billion devices which was "fueling tremendous growth in our services business."

I suspect the just-released HomePod is intended as much as a carrot to induce more Apple Music subscriptions as it is a competitor to Amazon.com Inc.'s (Nasdaq: AMZN) Alexa and Alphabet Inc.'s (Nasdaq: GOOGL) Google Home.

Taken together, it's clear that Apple's prospects are much brighter than Wall Street is letting on. And company profits will grow enough this year to send AAPL stock to my one-year $200 price target.

Here are the numbers...

How Apple Stock Gets to $200 - and Beyond

According to FactSet estimates, Apple earnings for calendar year 2018 will increase to $12.22 per share from the current $9.73 (which is the earnings per share - EPS - for calendar year 2017). That's a 26.1% increase in profits over the next year - an amazing feat for a company already raking in $50 billion per year in annual profits.

Skepticism about Apple usually keeps its price-to-earnings ratio in the mid to high teens. Right now, Apple's P/E is 16.2. If the AAPL P/E remains at that modest that level, an EPS of $12.22 gives you a stock price of $197.96.

The P/E needs only edge up to 16.5 to get the Apple stock price to $201.63. That's actually a conservative estimate, as Apple's P/E has averaged 17.36 over the past 12 months.

And don't forget Apple's dividend payments - currently $0.63 a share, but expected to increase annually - will add to your total return.

Investors who hold AAPL stock a couple of years longer will see even bigger gains - to $250 a share, according to Money Morning Director of Technology & Venture Capital Research Michael A. Robinson.

Robinson believes the cash freed up by the new tax law will continue to fuel the rise of Apple stock, through research spending on new products as well as stock buybacks and dividends.

"With all of that cash Apple has overseas washing up on our shores, those programs are about to get supersized," Robinson said. "This stock is headed to $250 within 30 months."

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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