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Why Apple Investors Shouldn’t Be Overly Optimistic

Posted On August 4, 2017 4:59 pm
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An Apple iPhone 8 being handheld

Apple Inc. (NASDAQ:AAPL) shares skyrocketed on Tuesday after the company posted a sterling third quarter report, beating estimates on revenue and earnings. The iPhone maker earned $1.67 per share in the third quarter on $45.4 billion revenue, while the Street was expecting EPS of $1.57 and a revenue of $44.89 billion with Apple stock.

Apple sold a whopping 41.026 million iPhones in the period, in-line with the consensus estimate. The results snuff several uncertainties regarding iPhone growth and Apple’s future, but there are still some serious concerns investors should consider before amassing the stock.

We will discuss some of these concerns in this article. But first let’s unravel Apple’s third quarter results.

iPad Sales Get a New Life

Apple Inc. (NASDAQ:AAPL) also surprised investors by posting the first-ever sales growth for iPad since 2013. The company sold 11.42 million iPads in the third quarter.

Analysts had grilled the company in the past for sticking to iPad and launching its new versions despite of the declines in the tablet market worldwide. But it seems Apple’s new iPads are serving the purpose to reinvigorate the dying market.

In March, Apple launched its entry-level fifth generation iPad whose basic version starts at $329 for 32GB of storage.

A Solid Q4 Guidance: New iPhone Coming?

Contrary to the expectations, Apple Inc. (NASDAQ:AAPL) also gave a solid fourth quarter guidance on Tuesday. The company expects a revenue of $49 billion-$52 billion in the period, versus the consensus of $49.21 billion.

Analysts were expecting a bleak guidance amid fears of a delay in the launch of iPhone’s latest version this year.

Related: Here’s Why You Shouldn’t Buy Netflix Stock

Services Business: A New Important Revenue Stream

Apple’s services business, which doesn’t get much attention, grew about 22% in the third quarter on a year-over-year basis — as compared 18% growth reported in the last quarter.

Apple Inc. (NASDAQ:AAPL) now has a target to double its services revenue by 2020. Analysts think that the recurring nature of services revenue and subscription model will help the company improve its margins.

Why All is Not Good for Apple

Despite the strong third quarter results, all eyes are on the post-iPhone 8 scenario at Apple. iPhone 8 will have several new features and a hefty price tag of $1000 (or even more, according to some reports). Analysts warned earlier this year that customers are backing off from buying new iPhones amid a lack of new features and rising costs.

Apple also has a plethora of competitors to beat. The company has been unable to regain the revenue growth it once used to enjoy.

A chart of Apple's Year-to-Year Quarterly Revenue

Apple revenue fell in early 2016 for the first time in 13 years, which was a big wakeup call for Apple bulls. Since then, company has contended that the 2017 version of iPhone will herald a new “super cycle” of sales.

But analysts believe that even if Apple launches a new iPhone in September, it won’t able to see its effect on revenues until 2018, which would result in even more waiting for Apple Inc. (NASDAQ:AAPL) bulls, who are hungry for clarity and certainty.

Apple Inc. (NASDAQ:AAPL)’s third quarter report has a bad news which is making investors nervous. Revenue in China, the most important growth market, dropped by about 10% year over year. This was the sixth consecutive quarter of revenue drop in China for Apple. The company is facing a tough competition by low-cost market players like Xiaomi and OnePlus.

Related: Amazon Stock: Is it a Bubble Ready to Burst?

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