It's been a tough few months for investors in Apple (NASDAQ: AAPL). After topping a $1 trillion market cap last August and climbing to all-time highs above $230 per share, the stock plummeted to $142, a level not seen in more than 18 months. This came on the heels of an iPhone slump in China that torpedoed the company's first-quarter results.
While the stock has since recouped some of those losses, the question remained as to whether Apple could grow its services business fast enough to make up for the dearth of iPhone demand.
The combination of negative sentiment, the coming of 5G, and an appealing price point have led some analysts to conclude that Apple is a compelling bargain going into its next earnings report.
The transition to 5G will drive upgrades
Last week, Raymond James analyst Chris Caso upgraded Apple to outperform (buy) from market perform (hold), slapping a $250 price target on the shares. He voiced his increasing optimism regarding the transition to 5G phones that is expected to occur in 2020. He sees this as a "compelling" reason for owners of older iPhones to upgrade to newer models, particularly since many users skipped the last upgrade cycle.
"With an aging installed base, we think a reasonably priced 5G phone will be a very compelling upgrade," Caso wrote in a note to clients. "While there's some question about the customer utility for 5G, we think there's enough sweat and money being spent by the carriers on this technology that they will convince customers of the utility."
Apple's settlement with Qualcomm also helped allay concerns that the company wouldn't be able to launch a 5G iPhone with its peers in the coming year, now that the iPhone maker has announced it will use Qualcomm modems in the next-gen iPhones.
That optimism continued today when Morgan Stanley analyst Katy Huberty increased Apple's price target from $231 to $247, noting that this is an "attractive setup into earnings." Investors have been unusually negative about Apple's future, even though the stock has gained nearly 20% since May and is up more than 80% since the recent low it hit in December.
An acceleration of services revenue in the second half of the year may be the key to turning the tide of investor confidence. Apple unveiled four new services in March, at least half of which will be available to consumers this year. Wall Street was unimpressed, leaving its revenue forecasts unchanged through the end of the year, despite the growing number of services feeding one of its fastest-growing segments.
Huberty argues, "The combination of negative investor sentiment, the potential for a services acceleration in June, and a low bar for September guidance keep us positively biased into earnings." The analyst went even further, calling Apple "a top pick into year end."
Right around the corner
Investors won't have to wait long for answers: Apple is scheduled to report earnings after the market close on Tuesday, July 30. Management's forecast for the fiscal third quarter included revenue in a range of $52.5 billion to $54.5 billion, implying that Apple could return to growth if it hits just the midpoint of its guidance.
That would be good news for Apple shareholders, and my money's on Apple.
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Danny Vena owns shares of Apple and has the following options: long January 2021 $190 calls on Apple and short January 2021 $195 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.