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Apple stock: Bears challenge in Q2 earnings (NASDAQ: AAPL)

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investment thesis

Apple company (Nasdaq: AAPL) to report its FQ2’22 earnings card on April 28, after a turbulent quarter that saw the largest COVID shutdowns in China since 2020. Apple stock was also affected as it neared earnings card. The market was interested in influencing the production of its devices, due to its Extensive List of Suppliers in China.

Despite this, AAPL stock continued to outperform the Invesco QQQ ETF (QQQ) and its big tech peers. We find it surprising that investors do not give AAPL enough credit for FCF’s strong profitability, backed by an incredibly well-managed supply chain. Furthermore, we believe the market has also ignored massive share buybacks, as Apple continues to create tremendous shareholder value.

Given the recent correction in AAPL stock, we’re discussing why AAPL stock remains a buy in its earnings release.

Review Apple’s estimates downward

Apple revenue consensus estimates

Apple revenue consensus estimates (Standard & Poor’s Capital IQ)

Apple's profitability consensus estimates

Apple’s profitability consensus estimates (Standard & Poor’s Capital IQ)

Given the expected moderation in its underlying growth, we can understand some investors’ concerns about AAPL stock. We’ve seen how this moderation has affected other growth stocks over the past year. It has also affected Microsoft (MSFT) and Google (GOOGL) (GOOG) in the past few months. Therefore, investors were concerned about the slowdown in Apple’s revenue growth after its impressive performance in 2021.

Apple also saw its FQ2 and FQ3 estimates shrink due to COVID concerns in China. The company is expected to report second-quarter revenue of $94 billion, up 4.9% year over year. It undoubtedly represents a significant slowdown from the 53.6% growth rate recorded last year.

However, we would like to make clear to investors that Apple’s gross margins are expected to remain stable, despite moderating its revenue growth. Notably, it is expected to post a gross margin of 43.1% for the second quarter of the year, an improvement from 42.5% last year.

Moreover, EBIT margin is also expected to remain resilient despite the supply chain and logistical wrangling. Apple is expected to report an EBIT margin of 29.8% in FQ2, down from 30.7% last year.

However, Apple could be hit more hard in FQ3 due to the recent COVID shutdown. As a result, its EBIT margin estimates for FQ3 have been revised to 28.1%. It could also be her weakest performance over the past year. Hence, we believe that the recent bounce in AAPL stock has reversed these potential headwinds in China, given its importance to Apple’s supply chain.

Apple FCF margins consensus estimate

Apple FCF margins consensus estimate (Standard & Poor’s Capital IQ)

However, Apple is still expected to post strong syndication margins in FY22 at 26.9%, up from 25.4% in FY21. However, Apple’s FCF growth may slow down through FY23. Notably, Apple’s FCF growth estimate for fiscal year 23 has been significantly revised from 10.5% to 7.5%, which may affect Apple’s stock valuation. Therefore, it is difficult to argue that the market did not reflect the overall headwinds and supply chain in Apple’s business.

But AAPL stock still has reasonable value

AAPL NTM FCF Stock Return % vs.  Peers

AAPL NTM FCF Stock Return % vs. Peers (TIKR)

AAPL stock performance to date % vs peer performance

AAPL stock performance to date % vs peer performance (couven)

We can understand why some investors feel that AAPL stock is due to a major correction. It is clear from the second chart that AAPL has outperformed QQQ, MSFT and GOOGL. Therefore, the fear that a rebound will hit AAPL stock next is understandable. But investors should consider their concerns in the context of their assessment.

If we consider MSFT stock to be reasonably valuable at 3.4% NTM FCF, why don’t we think AAPL stock is reasonably valuable at 4.1% NTM FCF? It should be emphasized that we do not consider AAPL stock to be undervalued. It appears to be of some value to us, and this is still a compelling thesis for AAPL stock. However, we need to size our exposure appropriately (if we add), given its rating.

Therefore, we believe that some investors failed to give enough credit to Apple’s formidable FCF machine.

Is AAPL Stock Buy, Sell or Hold?

AAPL stock is a buy as it heads into FQ2 earnings. Also, there may be another bullish surprise that Apple has used a lot, and we haven’t discussed: share buybacks.

The Street expects management to announce a large buyback program that could exceed the $90 billion announced last year. Trim Articulated Asset Management (Editor):

Apple’s free cash flow and buybacks have certainly supported the company to a greater degree than its peers. Everything is under pressure right now, and investors are looking for names with high quality and sustainable profitability from free cash flow. Apple is at the top of that list. – Bloomberg

Therefore, Apple investors could be treated to a pleasant surprise if management decides to allow buybacks that validate our interpretation of AAPL stock valuation.

as such, We reiterate our buy rating for the AAPL stock Heading into its FQ2 earnings.

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