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Apple’s Post Earnings Sell-Off Presents Opportunity

Shares of iPhone maker Apple (AAPL) have sold off following its second-quarter results. Though its performance set a new non-holiday record, its management forecasts a substantial hit to its top and bottom lines due to ongoing supply chain issues.

During the latest earnings call, CFO Luca Maestri pointed out that pandemic-led disruptions and the global semiconductor shortage have been hampering Apple’s ability to meet demand. The tech giant could lose $4 billion to $8 billion in sales in the current quarter. Consequently, Maestri’s comments had investors pushing the panic button.

The current broad-based volatility in tech stocks and the market is likely to weigh in on the stock in the interim. However, Apple’s business has been resilient, and with its robust balance sheet and market strength, AAPL stock remains a safe investment with healthy upside potential.

iPhone Continues Turning Heads

The global smartphone market is under duress amidst a challenging macro-economic climate. However, Apple has navigated the current downturn and iPhone increased shipments by 8% to 56.5 million units. It’s perhaps the only smartphone maker to achieve this feat, as its peers crumbled under pressure.

Moreover, the company increased its share in the global smartphone sector by 3% from 15% in the prior-year period. iPhone sales contributed $50.6 billion in sales in the last quarter, a 5.5% bump from last year’s same period. Overall the business made $97.3 billion, a 9% increase from the same quarter in 2021.

Since the pandemic’s onset, sales have been soaring at a breathtaking pace, with revenues increasing by 33% in 2021. The increase was over $90 billion more than its 2020 performance. During the first six months of the year, we saw Apple sustaining that incredible momentum, with revenues reaching a whopping $221 billion, a $20-billion improvement from the prior-year period.

Its second-quarter results came well ahead of analyst estimates, and iPhone demand was perhaps a key growth driver. Its revenues hit a quarterly record in March, accounting for over 50% of the top line, and exceeding analyst expectations by a wide margin.

Hence, with rising volumes and its incredible potential in the 5G pace, it can effectively sustain its impressive momentum over the long term.

Outlook

Apple’s blow-out revenues were overshadowed by the demand/supply imbalance continuing into the third quarter. The company expects these shortages to be in the $4 billion to $8 billion range, impacting upcoming quarterly results. Fortunately, lockdown restrictions in supplier cities are fading fast.

The management expects a remarkable showing in its Services segment. Its Services segment includes high-margin offerings, effectively offsetting the losses in its Products division due inflationary pressures.

The company expects robust gross margins of over 40% despite current challenges. Over the long run, with increasing efforts to accelerate the in-sourcing of components, the company can effectively sustain its margins.

Furthermore, Apple is investing heavily in its Services business which includes a wide variety of streaming options such as Apple Music and Apple TV+. Services have over 825 million subscribers. Last year, its services subscriptions increased by 165 million, and revenues from the quarter totaled $19.8 billion.

Wall Street’s Take

Turning to Wall Street, AAPL stock maintains a Strong Buy consensus rating. Out of 27 total analyst ratings, 21 Buys, six Holds, and zero Sell ratings were assigned over the past three months.

The average AAPL price target is $190.19, implying 31.7% upside potential. Analyst price targets range from a low of $160 per share to a high of $215 per share.

Final Word on AAPL Stock

The decision to load up on AAPL stock is not easy at may seem. Its shares are trading at premium multiples, and its business faces considerable headwinds from high input costs and supply chain shortages. Since the onset of the pandemic, consumer demand has been impressive, and has hardly been affected by the inflationary pressures.

Apple has a penchant for consistently innovating, and generating billions in sales and free cash flows. Over the past five years, its average returns have grown over 43%, offering spectacular value for investors.

Hence, investors shouldn’t worry too much about near-term troubles for the company. Its biggest growth driver, the iPhone, continues firing on all cylinders in revenue expansion. Apple’s current stock market performance isn’t reflective of its growth trajectory, which effectively guarantees several years of outperformance.

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