Apple (NASDAQ:AAPL) had an acceptable 2016 with its stock price rising by nearly 11 percent for the year, but the stock has surged even farther over the past week. On Tuesday, it broke a 52-week high as it surpassed $119 per share and has received a “buy” rating from groups such as Drexel Hamilton and Vetr Inc., and Morgan Stanley called the stock “a top pick” for 2017.
The fact that Apple’s stock value is rising ahead of its upcoming late January earnings report is surprising, and the company will need to figure out how to do more than just pump out new iPhones. But there is a lot to like about Apple’s fundamentals, such as its cash reserves and low forward price-earnings ratio, and the tech company could be one of the biggest beneficiaries of the incoming Trump administration.
While the stock has surged over the past few days, investors should wait a few weeks until Apple releases its earnings report. Apple should probably be a safe bet in 2017, but there are some concerns about the company’s prospects and there is no need to make a move immediately.
Will the good news continue?
Apple’s stock, along with the stock market in general, has surged since November as businesses seem to be convinced that the incoming Trump administration will undo regulations and lower taxes. Morgan Stanley pointed to lower taxes and cash repatriation as two reasons for their optimistic Apple forecast. Apple could see its taxes lowered by as much as 11 points and would be among the largest beneficiaries of foreign cash repatriation as much of its profits are trapped overseas.
Apple can also point to other pieces of good news. Samsung (KS:005930) continues to struggle as it reels with the Galaxy Note disaster and the recent news that its vice chairman is being questioned for his connections to a South Korean influence scandal which saw its president impeached last month.
While this news benefits Apple, it is also a company which holds over $200 million in cash and holds strong fundamentals overall. When one considers the enduring popularity of its products, there is no doubt that Apple at the minimum is a safe investment.
Moving beyond the iPhone
While these company fundamentals matter, the one question which Apple needs to figure out is how it intends to move beyond the iPhone. iPhone 7 sales have been solid and the iPhone is set to come out in September. But the continued success of the iPhone over the years means that Apple’s opportunities for growth are more limited. The Wall Street Journal reported that Apple missed its own annual sales and profit goals for the first time since 2009,
because it mistakenly assumed consumers’ appetite for the iPhone 6S, introduced in 2015, would outpace demand for the predecessor device.
Customers who already bought an iPhone one or two years ago are not going to be interested in buying a new device, and iPhone sales declined in 2016. Apple has tried to expand with other hardware like Brock Beauty and the iWatch, but that has not been successful.
However, Apple can point to growth in its service sector, which consists of things such as iTunes, Apple Pay, and the App Store. Apple’s services grew by 24 percent in the 2016 4Q compared to the same period 12 months earlier. While that was not enough to make up for the iPhone sales decline, but the growing importance of the service sectors could represent another avenue for growth if Apple makes the necessary investments. The App Store in particular will be important for its business, as apps will continue to grow as mobile supplants desktops, and Apple still has the advantage over Google Play.
Wait and See
Apple is always tricky to evaluate, given its size and constant innovation, and there are solid arguments both in favor of either holding or buying. It has growth potential in its services sector and has the cash necessary to invest if its business should slow down, but declining iPhone sales are a concern that will not fade away.
However, the decision on whether to buy or hold is made moot by the fact that Apple will be releasing their earnings report in about two weeks. Investors should stand pat, wait for the report, and react accordingly.
This year is going to be turbulent for many companies. Apple’s initial report will be an early indication about whether they will be one of them.