April 30, 2019

It seems like the FAANG stocks are back in fashion with Wall Street bulls, having received solid first-quarter numbers from the likes of Facebook (FB), Amazon.com (AMZN), and Netflix (NFLX). By the time this column is published on Tuesday morning, Alphabet (GOOGL) will have posted results on Monday after the close, leaving only Apple (AAPL) to leave its impression on investors late Tuesday.

(Navellier & Associates owns NFLX in managed accounts and NFLX and AMZN our sub-advised mutual fund but does not own FB, GOOGL or AAPL.  Bryan Perry does not own FB AMZN, NFLX or GOOGL in his personal account.)

Bullish buying in the three FAANG stocks that have already reported led the S&P and Nasdaq to new all-time highs last week, setting the table for the market “melt up” that is being thrown around on business cable channels. The fuse to light the next bonfire of buying is apparently going to be attributable to Apple’s numbers due out after the bell today. The Street is looking for $2.36 per share in earnings, which would be lower year-over-year from the $2.73 per share reported in Q1 2018 on sales of $57.9 billion.

Quite frankly, Apple has a lot on the line in this report. The stock has rallied 31% from its $155 low after warning of lower first-quarter iPhone sales, closing at $204.30 last Friday. The options market is net bullish on the stock, with calls outweighing puts by 2:1 and volume on the $220 calls swelling from 8,000 contracts to over 25,000 contracts from April 17 to April 25. That’s a pretty bullish swing. The stock has to trade around $222 for those options to break even.

In the prior quarter, iPhone sales made up 61.66% of Apple’s total sales, with iPads accounting for 7.98%, Macs 8.80%, Wearables 8.67%, and Services 12.90% (source: Statistica). For the past three years, Services have steadily grown as a percentage of total revenue as the company strives to head off an eventual peak in the global iPhone product cycle. And while 12.9% is a good and rising number, it may not be enough to win the day if iPhone sales come in light of already-lowered expectations.

for China’s economic growth outlook following the surprise GDP surge. Citi, Barclays, and ING all jumped in the pool of investment banks clamoring to call a bottom in the emerging market slump. (Let it be noted that this column was making a case for such an assumption before the analyst community had the luxury of seeing the hard data.)

In making this call before the rest of the crowd, I was simply highlighting the bullish price action in oil and copper, while respecting the charts that were all turning higher – with a few significant “golden crosses” materializing in some leading foreign developed and emerging market ETFs. After three decades of following markets intensely, I’ve learned not to tie myself emotionally, politically, or theoretically to any position – because money will always go where it is best served and where opportunity beckons.

So we have what looks like a recovering global stock market. Despite all the worries of currency crises, geopolitical fallout, recessionary data from global economic ivory tower watchdogs, negative interest rates in Japan, and socialist cries for an end to capitalism, stocks around the world are in rally mode.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

According to IDC, the global smartphone market shrank by more than 4% in 2018 and could shrink again this year. Earlier this month the world’s largest seller of smartphones, Samsung, warned that its profits will drop 60% as smartphone demand slumps. China, the world’s biggest market for smartphones, has been particularly weak, hit by saturated markets, consumers replacing their phones less often, and by frustration over rising prices. (iPhones start at $749 and go up to $1,500+ with all the trimmings.)

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

Apple iPhones Will be Late to the 5G Party

Another major challenge is whether Apple can release a 5G iPhone by Christmas after settling with Qualcomm, which has the 5G chipset Apple so desperately needs after Intel dropped its plans to deliver one to Apple some time in 2020. Samsung and other smartphone makers will deliver 5G smartphones in 2019. I would think anyone willing to spend upwards of $1,000 for a new smartphone will demand 5G, and 5G smartphones are available now. The Motorola 5G Moto Mod is out and is capable of connecting to Verizon’s just-launched 5G network. Many other new 5G models will hit the market this quarter – the Huawei Mate X, Samsung Galaxy S10 5G, Xiaomi Mi MIX 3, LG V50 ThinQ, and ZTE Axon 10 Pro 5G.

Navellier & Associates owns INTC in some in managed accounts but not in our sub-advised mutual fund. Navellier & Associates does not own Qualcomm, Samsung, Motorola or Verizon.  Bryan Perry does not own Intel, Qualcomm, Samsung, Motorola or Verizon in personal accounts.

There is always a first-to-market advantage, and there is genuine concern that Apple may not have a 5G iPhone until mid-2020, which in the crushingly competitive gadget business, is considered a lifetime. It’s a huge task for Apple to deliver 100 million new iPhones by the end of 2019, considering the beta testing that has to go into a new launch. The Mac rumor mill says a 5G iPhone is a 2020 event and is testament to why tethering current customers to Apple Services is so vital to the company’s 2019 performance.

Apple’s late entry into 5G is why there is inherent risk in owning Apple at its current PE of 16x – its highest in three years – as earnings are expected to decelerate slightly in Q1 2019. There could be a sizable waiting period for Apple 5G iPhones shaping up as consumers are already balking at higher prices and are getting peppered with “5G now” ads from brands that are already on the market.

The other major obstacle is the arrival of multiple “mid-market’ Android smartphones priced in the $200 to $400 range capturing a rising number of consumers looking for a product that is simply “good enough” for the majority of their daily usage. This new breed of mid-market phones has core performance that equates to recent generations of flagship iPhone and Galaxy smartphones that don’t require upgrading to get much higher quality features. This is the “commoditization” of an industry at work.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary

It will be hugely interesting to see if the big bet on the Services side of Apple’s business can weather the storm that is probably brewing – later this afternoon – in its high-margin side of the business – hardware.

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. *All content of “Income Mail” represents the opinion of Bryan Perry*


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