Should investors avoid Apple’s share price ahead of earnings?

Apple’s [AAPL] share price has struggled to recover from the September tech sell-off, when the stock fell 10.2% during the month. Apple’s share price has remained relatively flat since, gaining just 0.6% throughout this month to 27 October, when it closed at $116. Will Apple’s share price continue this muted performance after the company announces its fourth-quarter earnings report, expected on 29 October?

Apple’s share price has been a popular play among investors in 2020. After falling 23.4% at the start of the year to a low of $55.84 on 23 March, Apple’s share price went on a bullish run, rallying 147% to a record intraday high of $137.98 on 2 September.

A broader tech sell-off last month then halted Apple’s share price in its tracks.

The ensuing dip knocked the stock off the $2trn valuation that it had finally hit in August. Apple’s share price then reclaimed this milestone valuation again this month, before dropping below for a second time on 21 October, YCharts data shows.

Based on the company’s forward PE ratio of 35.38, the tech giant is massively overvalued. To put that figure into perspective, Apple has had an average PE multiple of 16.34 over the past five years. Among the top 20 stocks analysed by Morningstar in late September, Apple’s share had a 37% premium on the research group’s fair value estimate, making it the first most-overvalued stock alongside the likes of Tesla [TSLA], Netflix [NFLX], Nvidia [NVDA] and PayPal [PYPL].

Potential for iPhone sale squeeze

Apple posted a blowout third-quarter earnings report at the end of July. The company saw revenue climb 11% year-over-year to $59.7bn and an earnings jump of 18% to $2.58.

Ongoing uncertainty surrounding COVID-19 has meant the company declined to issue guidance for the upcoming quarter. CFO Luca Maestri did say on its previous earnings call that he expected iPhone supply in the fall would be delayed because of disrupted schedules.

This delay will likely hurt demand for the latest model when it’s released which, according to Harsh Kumar, an analyst at Piper Sandler with an Overweight rating on the stock, is already pegged to be underwhelming.

A recent survey of 1,000 people by the firm shows that only 10% of iPhone owners say they plan to upgrade to the newest iteration, compared to as many as 23% in previous surveys.

Although surprised, Kumar believes that the coronavirus pandemic may be “putting pressure on spending patterns this fall/winter”. Apple’s fourth-quarter earnings report should provide an idea of the extent of the impact. It will also give investors a glimpse at iPhone 11 sales, which started selling on 20 September.

Analysts forecast revenue to be $62.9bn and earnings of $2.84 per share, according to Refinitiv data as reported by CNBC.

Apple’s pivot to ‘iOS homes’

Apple’s valuation already has its upcoming iPhone 12 cycle priced in, David Vogt, analyst at UBS considered.

“Following a one-time COVID driven bump in Macs/iPads and a one-year iPhone 12 cycle in FY21, ‘product’ revenue should revert back to low-single digit growth over the next three years,” Vogt, who has a neutral rating on the stock, wrote in a note to clients.

For a long time, the iPhone has been Apple’s primary revenue driver and it will likely continue to drive investor sentiment in the near-term, according to Toni Sacconaghi, an analyst at Bernstein.

In the year ending 30 June, 54% of the company’s $249bn revenue was derived from smartphone sales. That does seem to be changing, however, with Apple’s decision not to report unit figures and ongoing pressures from manufacturers in China driving a shift to focus more on other business areas, including wearables and cloud services.

By turning individual iPhone owners into “iOS homes”, Apple is maximising the value per home, according to Laura Martin, an analyst at Needham. Not only does Apple now offer discounted family pricing, but more competitive pricing across its smartphone range generally should attract new customers. Martin rates Apple’s share price a Buy.

Among 45 Wall Street analysts polled on MarketBeat, the consensus is to Buy the stock. This was the opinion held by 27 analysts, while 15 rated it a Hold and three a Sell. The average 12-month price target of $110.79 represents a potential downside of just under 5% based on Apple’s share price at close on 27 October.