Ahead of the Tape: This Apple Still Has Room to Get Bigger -- WSJ

By Steven Russolillo Features Dow Jones Newswires

In today's buoyant stock market, tech giants keep getting bigger. Apple Inc., the biggest of all, isn't done growing.

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The iPhone maker's shares have surged almost 30% over the past six months, more than double that of the S&P 500. Amazon.com Inc. and Alphabet Inc., Google's parent, have had double-digit-percentage gains, too.

Such rallies over short time frames would normally produce sticker shock in the tech sector. But Apple's earnings report on Tuesday and, more importantly, the new iPhone expected later this year, should give investors confidence that the rally still has legs.

Analysts polled by FactSet estimate fiscal second-quarter earnings of $2.02 a share, up 6% from a year ago. Quarterly revenue for the period ending in March is expected to have increased 5.3% to $53 billion. IPhone sales, which make up roughly two-thirds of Apple's overall revenue, are expected to tick up 4.3% from a year ago, the second straight quarter of year-over-year growth.

But what investors seem to be focused on the most is the new iPhone. Apple usually updates its smartphone lineup once a year and this year marks the 10-year anniversary of when the first iPhone was released. Expectations are therefore high. The Wall Street Journal reported earlier this year that Apple's next iPhone will have a curved screen and will be more expensive than current models. Analysts concur that the average selling price of an iPhone in the current fiscal year will increase for the first time in three years.

Apple shares typically rally ahead of an iPhone release. This year will probably be no different. In the three months before Apple launched new or updated iPhones -- typically in September or October -- the stock has averaged a 20% gain, according to Bespoke Investment Group. Those rallies have tended to fade once the product is released, though. The market buys the rumor and sells the news. Apple shares have averaged a roughly flat performance in the month that follows an iPhone announcement.

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Maybe not this time. Analysts at Credit Suisse are optimistic that the new iPhone "super cycle," as they call it, will help drive replacement rates higher and attract new customers from other platforms, such as Android. This is an opportunity for Apple. The research firm e-Marketer says Apple accounts for 44% of the U.S. smartphone market, trailing Android's 52% share.

Despite Apple's sharp rally, its stock still looks reasonably priced at 15 times projected earnings over the next 12 months. While that isn't quite the bargain it was in recent years, it is still about 25% cheaper than a basket of rivals, including Alphabet, Microsoft Corp. and Facebook Inc.

This Apple appears ripe for more gains.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

May 01, 2017 02:47 ET (06:47 GMT)