Markets "got over”" the warning Apple (NASDAQ:AAPL) issued weeks before its earnings report. And ever since the stock bottomed at $142 to start the year, shares added ~$25 a share after reporting quarterly results. Does beating the EPS estimate by a penny justify the rally?
Apple reported revenue falling 5% in the first quarter but beat estimates. The "less-bad" news sent the stock higher and the P/E back to around 14 times earnings. Despite the realities and the consequences of lower unit iPhone sales, investors ignored the growing risks in the main business.
Services profit margin are solid, as expect, but risks falling as iPhone users decide to switch to Android. If loyal iPhone 6 users delay their upgrade, they may also hold back services spending because the hardware is too slow to handle demanding apps.
In the near-term, AAPL stock may hold up as it pays a dividend yielding 1.75%. With no positive catalyst, like a return to higher unit device sales or higher profit margin expansion, the stock is stuck at a range at best. In six to nine months time, an iPhone refresh that is more competitively priced and does not have useless features might compel customers finally to upgrade.
