Apple (AAPL) earnings are coming up this evening — and lots of investors will be watching. The earnings release will give investors a better idea of how sustainable the company’s growth rates are. Adding to the pressure is the impressive performance Apple’s stock has seen. As shares are up 106% over the past 12 months, investors will be looking for a stellar quarter to justify another leg higher.
2019 was a very interesting year for Apple. The behemoth experienced negative year-over-year revenue growth in Q1 and Q2, while barely eclipsing 2018 sales during both Q3 and Q4 (1% and 1.8% growth, respectively). In addition, iPhone revenues, which have typically been the company’s largest sales driver, fell 15%, 17%, 12%, and 9% during each of the fiscal quarters. Despite these headwinds, Apple’s stock surged sharply thanks to the company’s sustained top-line growth in both services and wearables.
Apple’s services businesses include the Apple Store, Apple Music, Apple Pay, Apple Care, iCloud, and Apple TV. Sales from this segment surged 18% year-over-year and are expected to continue to grow throughout FY20 as new original content is now streamable via Apple TV+. More impressively, though, is the tech titan’s revenue growth in wearables/accessories. These products include AirPods, the Apple Watch, and Beats headphones, which accounted for sales growth of 54% in FY19.
As Apple is set to report earnings after market close this afternoon, Monness analyst Brian White has taken note of these trends and remains confident in the stock. Ranked #29 among all 13,000 overall experts on TipRanks, White has an established track record in investing in large tech companies with robust bottom-line growth.
Regardless of slowing iPhone sales, the analyst asserts that the company’s recent uptick in its services businesses will serve as a catalyst moving forward. In 4Q19, AAPL posted margins of 64.1% for its services business, more than doubling its current average product margin of 31.6%. Additionally, Q4 services generated 20% of the company’s total revenues, up 3% year-over-year. As Apple’s services business continues to grow, White is optimistic about the company’s future profitability.
Services is not the only reason the analyst maintains his bullish thesis; White is also very optimistic about its growth in both wearables and China. Monness predicts 1QFY20 wearables revenues will come in at $11.20 billion, which would mark a massive 53% increase year-over-year. In addition, iPhone sales in China increased 18% year-over-year, which showcases the fact that the tech giant is finally starting to make a considerable dent in this foreign market. White expects Chinese sales to grow by 20%-30% in Q1FY20.
Finally, although domestic iPhone sales were negative throughout FY19, the analyst is confident that this trend will not persist. In 2018, the iPhone X took the world by storm, but it is safe to say that the iPhone 11 did not live up to the previous iPhone’s hype. As the smartphone market continues to become more saturated, it could be increasingly difficult for the iPhone to remain Apple’s cash cow. However, even though year-over-year iPhone sales were negative in each quarter during FY19, from Q2 to Q4, losses narrowed from 17% to just 9%. Additionally, as 5G networks become more fully available, White believes that Apple’s iPhone revenues will resurge in the future, with its first 5G iPhones slated for release as early as September.
Monness predicts that Q1FY20 revenue will reach $87.89 billion, up 4% year-over-year. On top of this, the firm’s forecast for EPS is $4.43. These estimates fall slightly short of the Street consensus, which projects $88.43 billion in revenue and EPS of $4.54, respectively. White deems AAPL a Buy with a target price of $300. (To watch White’s track record, click here)
The analyst consensus from TipRanks tells a very similar story. Out of the 33 analysts polled in the past 3 months, 18 are bullish, 12 are sidelined, and 3 are bearish on the stock. However – and that’s a big however – with an average price target of $303.50, AAPL has an implied 4.5% downside from current levels. (See Apple stock analysis on TipRanks)