Earnings preview: is Apple now a value stock?

With Apple due to release its latest earnings, many will be following Warren Buffett’s lead to get in despite current woes.

Tuesday 26 July sees Apple release its latest earnings data, which promises to cast light on the firm’s much-publicized slowdown. The firm is heavily reliant upon iPhone, which has seen dwindling demand amid the continued expansion of primary rival Samsung.

Expectations for this period are notably more downbeat, with adjusted EPS predicted to fall almost 25% to $1.39. This in part explains the fact that the firm now trades at a 27% discount to the all-time highs of $136.

The issue is that the firm has experienced a deterioration in gross profit margins, which when coupled with falling sales in iPhones is expected to drive EPS heavily lower. Investors will certainly be on the lookout for gross profit margins and the impact it is having upon the firm’s EPS.

Apple has an issue when it comes to growth, because their perceived lack of invention in the absence of Steve Jobs means there are few original products in the pipeline. The firm clearly has incredible cash generative abilities, which will often be distributed to investors in the form of dividends or buyback schemes.

However, there are calls for this cash to be spent, with its largest acquisition coming in the form of Dr Dre’s Beats ($3bn) business. This was dwarfed by Microsoft’s purchase of LinkedIn ($26.2bn) earlier this year.

There is reason to believe that for a company which is failing to successfully diversify its revenue streams, acquisitions may be the smart way to move away from its reliance upon the iPhone. The issue is that given the sheer magnitude of the firm, the growth of a new acquisition could be totally overshadowed by any shifts in iPhone sales.

Another cause for concern is the fact that the firm has been cannibalizing its own margins by creating cheaper versions of the iPhones. These products have become very popular in emerging markets, yet for each new customer there will also be another who would have bought a higher value product yet downgraded because the option was available to them. This is yet another source of dwindling margins at a time where market share is difficult to come by.

Nevertheless, there is certainly a great deal of interest in the firm after a massive thumbs up from the main man of value investing, Warren Buffett. His $1 billion investment suggests that the firm is undervalued at current levels and provides many with a greater belief that this current rocky patch will soon return on trend. For a firm which has the money, talent and ability to find form once more, many will be hesitant to bet against such a revolutionary firm.

From a technical point of view, the firm has been trading within a falling wedge pattern, which is typically bullish for the eventual breakout. $105 represents a key area of resistance with trendline and the 50-week simple moving average both converging at the same price. Thus any massive outperformance on Tuesday would be looking for that level as a potential reversal point.

Ultimately, the coming week we will be looking for a continuation of this pattern, with buyers likely to come back in around the bottom of this wedge. The resolution of this wedge is expected to be a bullish breakout and as such, many will be looking at the current price as a great entry opportunity.

The ultimate bullish breakout signal would be a closed candle above $112, with $123 and $136 the next major resistance points. A break below this pattern would be a worry, yet despite the current woes, we expect this current weakness to be resolved with yet another break higher.

This firm will be around for a long time yet, and many will be following Buffett’s lead to grab a share of this firm at a 27% discount to the 2015 high.

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