How Can You Afford Not to Be Invested in Apple?

Autumn. You should see the backed up traffic out in rural eastern Long Island this time of year. Out by the farm and the orchards. You could spend all day moving less than five miles an hour on a country road because it’s October. Everyone decided to pick their own apples.

Well, it’s also just a few days before the third quarter earnings season kicks off in earnest this week. Analysts always try to position themselves ahead of the season, and the results of this season come with more uncertainty than usual. More importantly, analysts are trying to get Apple (AAPL) just right with about two weeks to go there, as Apple is the US equity market, sort of. As Apple stock goes, so does go the S&P 500. It’s Apple picking time.

Just This Week

Last night, readers may have noticed KeyBanc four star rated (by TipRanks) analyst Brandon Nispel maintained his “overweight” rating and $185 target price for AAPL, while increasing his estimates for revenue and adjusted EBITDA on data that shows increased spending based on demand for the iPhone 14 Pro Max and iPhone 14 Pro.

This came after earlier on Monday research firm IDC noted that Apple likely shipped 10.6M Mac computers in the third quarter, which would be up 40.2% year over year. Readers will recall from this morning’s Market Recon that globally, almost 20% less PCs shipped during the third quarter than during Q3 2021, so this would be a big deal.

However, earlier than that, on Monday morning, five star (at TipRanks) Bank of America analyst Wamsi Mohan who has a “hold” rating on AAPL with a target price of $160, cut his estimates for iPad sales for 2022, 2023, and 2024 below consensus, suggesting that more than a quarter of the iPads sold between 2020 and early 2022 could be “excess” as people replaced older model for remote work and school. Wamsi had cut his iPhone estimates for the next few quarters back in late September.

Back to last night… five star (TipRanks) Wells Fargo analyst Gary Mobley downgraded chip maker Qorvo (QRVO) to “equal-weight” from “overweight”, while cutting his target price from $130 to $85. Why? Yes, group multiples, but also because of the firm’s reliance upon Apple. Needless to say, this news pressured APPL early on Tuesday morning.

Earnings

Apple is expected to report after the closing bell on Thursday, October 27th. Wall Street is looking for GAAP EPS of $1.27, within a range of $1.13 to $1.35, on revenue of $88.8B. The range of expectations on the revenue side runs from $85.1B to $92.8B. At the precise expectation, these numbers would be good for earnings growth of 2.4% on revenue growth of 6.5%.

Last quarter, Apple ran with a current ratio of 0.87. This was the second consecutive quarter Apple’s current ratio ran below 1.0. That may surprise a few folks that don’t look at balance sheets. That said, Apple does not pad the asset side of the balance sheet with entries for “goodwill” or other intangibles. Certainly the brand name alone would be worth a fortune.

The firm has a hefty debt-load, which I do not love, that was built during a very low interest rate environment. That kind of makes them look smart. Free cash flow held steady at $1.29 per share in Q2. That was down from Q1 and Q4, but up from the year ago comp. Tangible book value printed at $3.61 at the end of the second quarter. That was down from an average of $4.07 for the four quarters prior.

I do not love the balance sheet the way it is. I see how the firm is managing it, and I “get” the strategy. I think. But, I do not love it. That said, the firm buys back the shares, pays a small dividend, and just about everyone and every fund you know is invested in the name, whether they know it or not. So, what do I do?

My Take

I follow a couple of analysts rather closely. Ivan Feinseth, rated at five stars (by TipRanks), of Tigress Financial is one of them. Ivan is not just a “five-star”, he is literally top 2% to 3% in my book, and might just be the alpha dog when it comes to Apple. Yeah, I know other analysts are more visible. So what.

Feinseth has a “buy” rating on AAPL with a $210 target price. That target price is second only to Dan Ives at Wedbush ($220), who is another one of my most closely followed analysts. Last Monday, Feinseth wrote that recent weakness in the shares is an opportunity. He said, “AAPL’s industry-leading position and strong brand equity, driven by its innovative ability and powerful cash generation, will continue to generate an increasing Return on Capital, driving the ongoing growth of Economic Profit and shareholder value creation.”

Feinseth also sees the CarPlay Interface underscoring the firm’s effort to expand its presence in the automotive market and an eventual launch of a virtual reality headset as a coming driver. In short, Feinseth sees “new product introductions, an ever-expanding ecosystem, and increasing services revenue” continuing to drive accelerating performance trends and cash flow.

My question is, after understanding how invested the public is in AAPL, and how truly great analysts who are good at their job like Ivan feel… If I am invested in equities, can I afford to not be invested in AAPL?

The stock has been consolidating all year, and has been technically weak of late. All three of our most focused upon moving averages (21 day EMA, 50 day SMSA, 200 day SMA) are trending lower. My thinking is that AAPL can be bought down to $129. Losing that level would create a new 16 month low and would force a rethinking on the stock.

Don’t get me wrong. I am not betting the farm. My largest area of exposure right now is cash. Then, as it has been, to defense contractors. Then some energy and pharma. I am not all in, not even close to it. Apple, I think is a special case. It gets it’s own place on my book.

(Apple is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells AAPL? Learn more now.)