Apple’s (AAPL) Pessimism Too High; Time to Buy the Stock?

Apple Inc (NASDAQ:AAPL) discloses its third-quarter numbers after Tuesday’s close. Wall Street on average expects the tech giant to report its second straight quarter of iPhone declines with sales of 40 million units at an average selling price of $603. Revenues are forecast to come in at $42.2 billion and earnings of $1.40 per share. This would show a 16.30% decrease from the 2Q16 revenue of $50.6 billion as well as a decrease of 14.62% from the same period in Q3’15. Earnings per share are expected to show a decline rate of 24.86% from $1.85 per share a year earlier. Meanwhile, EarningsWhisper.com reports a whisper number of $1.43 per share.

Last quarter, Apple sold 16 percent fewer iPhones compared with the same period last year. It was the first year-over-year sales decline in the history of the device, which accounts for almost two-thirds of Apple’s profits. What’s more, and despite Apple’s efforts to kickstart iPhone sales, smartphone sales decline may be getting worse than expected. Speaking to this point in report rolled out early Monday morning, UBS’ Steven Milunovich said that June smartphone survey shows North American smartphone buying interest is at its lowest levels since FY 2008, a trend the analyst believes has likely extended globally. Milunovich also said that iPhone 7 interest levels are similar to the iPhone 6s. Meanwhile, Maxim Group expects Q3 iPhone sales to come in at 37.8 million units. Notably, the firm projects iPhone units sales to be down 21% quarter-over-quarter.

To counter the sort of pessimistic note that characterized Apple’s last earnings results, the company will most likely shift the tone of Tuesday’s conference call towards the Services segment, which includes iTunes, the App Store, iCloud, Apple Pay, Apple Music, Apple Care, and licensing. Software and services was one bright spot last quarter, with revenue up 20 percent to $6 billion. Apple’s revenue from these sources were $3.7 billion in Q1’13.

While the iPhone remains Apple’s flagship product, the Services segment is now Cupertino’s second-most valuable business. Although Services only accounts for 12% of Apple’s total revenues versus iPhone’s 65%, the segment has been growing at a fast pace. In fact, the segment’s revenue growth rate, as well as the growth of the company’s one-billion-plus installment base, which has accelerated the pace of service sales, pushed Apple CEO Tim Cook to call earlier this year the division a “large and important source of recurring revenues” for Apple.

That said however, the lag in hardware remains a persistent issue for the company. Analysts have started to shift their attention to the launch of the iPhone 7, which according to Apple Insider is scheduled for the week of September 12, in line with Cupertino’s usual fall iPhone-launch cycle. The Street is hoping a new replacement cycle in FY 2017, when Apple skips to the iPhone 8 with significant changes, will help the company’s high growth rates return. In the meantime, more volatility in Apple stock after the initial iPhone 7 rollout-followed by seasawing between small gains and losses is to be expected.

Apple Stock Action

On Monday, Apple stock, which represents a significant portion of the value of the S&P 500, fell 1.34% to $97.34.

It is worth pointing out that the $90.00 level is a major point of resistance for AAPL, and as such it should be watched carefully. A failure to penetrate this key level could portend further technical downside for the stock, while a successful break and hold of this level could fuel it towards the $100 mark.

In the past 52 weeks, shares of the iPhone maker have traded between a low of $89.47 and a high of $123.91, with its 50-day MA and 200-day MA located at $97.00 and $99.29 levels, respectively.

Apple currently prints a one year loss of about 20 percent. Since the beginning of the year, the $538 billion market cap name has lost more than 5 percent of its value.

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