Apple (AAPL) is expected to report fiscal second-quarter earnings today, which could build-up some more constructive commentary relating to its sagging numbers in mainland China. Investors and analyst are hopeful of a turnaround in the company, and anything related to better than expected China results, more service revenue momentum, or perhaps an uptick in Apple Watch shipments would drive the stock forward.
Albeit, there are a couple caveats to Q1’19 figures that might surprise to the downside, such as inventory related challenges (though this might be less likely given the weak shipment figures from Q4’18 may have altered Apple’s iPhone build assumptions). Also, Apple did cut pricing in China, so there could be solid commentary relating to those pricing adjustments on the quarterly earnings call as well.
Currently, the consensus anticipates that Apple will report revenue and dil. EPS of $57.44 billion and dil. EPS of $2.36. Revenue is expected to decline by 6% whereas dil. EPS will decline by 10% according to estimates. The company is anticipated to report at the high-end of its outlook range, and absent of solid earnings results, the stock is highly susceptible to drop following the announcement, as expectations already embed a drop-off in unit shipments.
Expectations have shifted toward iPhone upgrades, as opposed to new customers, and this is unlikely to change when Apple discloses global installed base figures. The number of customers within the upgrade window that could convert into customers during Q2’19 could drive meaningful revenue contribution, hence not all hope is lost, as iPhone revenue could surprise on upgrades. Also, Apple is anticipated to announce an update to its capital return policy (dividends and share buybacks), and the recent settlement with Qualcomm will result in a cash charge, so EPS comps might look a little worse than anticipated.
Shareholders probably won’t care if Apple misses EPS estimates, because of the Qualcomm settlement, but worse than expected results tied to iPhone or Service revenues will definitely take the stock lower, hence all eyes are on Chinese results, which contributed to prior quarter’s earnings miss.
Ahead of the print, Daniel Ives of Wedbush Securities maintained his Outperform rating on Apple stock, with $225 price target:
We are expecting at least an in-line quarter and likely a beat on stronger iPhone revenues as China consumer demand rebounded. With ~900 million active iPhones worldwide and 350 million of those in a window of an upgrade opportunity over the next 12 to 18 months based on our analysis, we estimate between 60 million to 70 million of iPhones slated to be upgraded/new purchases are out of the key China region.
Ives is not alone in his optimism on China as other analysts anticipate a recovery in the region. However, while analysts are convinced of a recovery, institutional investors aren’t convinced by the recovery that’s broadly anticipated. Morgan Stanley’s Kathryn Huberty stated:
Conversations with institutional investors suggest that most are uninvolved or underweight/short despite the likelihood of Services growth re-accelerating, iPhone declines moderating, and continued share price support from the company buying back stock. Apple to announce a 10% dividend raise and at least a $50B increase to buyback authorization.
Given that expectations are so low, and with some going so far as to sell short the stock, and many others on the sideline, there’s a lot of room for investor sentiment to improve. Also, the on-going service revenue ramp will remain one of the bigger bright spots in the quarter, and any revenue acceleration in the services segment could boost the share price following the quarterly earnings announcement. Some good news on iPhone shipments could also get investors off the sidelines with share buybacks adding incremental upside, so the worst might be behind us.
TipRanks reviewed 26 analysts and the results are divided. 16 are bullish on Apple stock, 16 are sidelined, while only 2 are bearish. The consensus price target stands at $201.86, suggesting the stock is fairly valued.
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