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Photograph by Emmanuel Dunand/AFP via Getty Images
Apple
will report fiscal-first-quarter earnings after the close of trading on Tuesday.
As Apple stock’s (ticker: AAPL) remarkable recent performance demonstrates, expectations are sky high. Apple stock has more than doubled since the beginning of 2019, rallying about 10% already in 2020. The stock has appreciated 32% since the last earnings report, boosting the company’s valuation in that span by about $344 billion—or about $4 billion a day. Including weekends.
Apple’s guidance for the fiscal first quarter, ended December, called for revenue of $85.5 billion to $89.5 billion. The Street consensus estimate is at $88.4 billion, but estimates have been rising, and any report inside the guidance range might be viewed as disappointing. The Street sees profits for the quarter of $3.03 a share. Also keep a close eye on guidance for the fiscal second quarter ending March: Consensus estimates for revenue and earnings per share are currently $62.5 billion and $2.82, respectively, but a growing chorus of Wall Street analysts contend the current view is too conservative.
The huge runup in Apple stock has been driven by a few specific factors: Better-than-expected sales of iPhone 11; soaring demand for AirPods (the New York Times just published a length first-person account in the news section of what to do if you drop one of your AirPods into a subway grate); growing expectations for the company’s services business; extreme optimism about the prospects for the first generation of 5G iPhones in the fall; and slightly improved dynamics between the U.S. and China on trade issues.
Here are a few things to look for when the report comes out on Tuesday afternoon:
iPhones: In the September quarter, iPhone revenue was down 9%. Investors will want to see confirmation of the growing view that demand for iPhone 11 has been robust—and that margins in the phone business will not be negatively affected by apparent consumer preference for the entry-level version of the phone.
Wearables: Apple has a breakout hit on its hand with AirPods; the overall wearables segment grew 54% in the September quarter. Investors are anticipating another huge growth quarter, reflecting holiday season popularity of both AirPods and Apple Watch.
Services: Apple has made a huge bet here, and the Street will want to see another strong quarter after posting 18% growth in the fiscal fourth quarter. One obvious question: Will Apple provide any subscriber data for streaming service Apple TV+?
China: There are worries that Apple’s business in China could be hurt by the aggressive rollout of 5G phones by local market players such as Huawei Technolgies, Xiaomi, Oppo, and Vivo, all of whom will have 5G models on the market ahead of Apple. The company’s sales in “Greater China” were down 2.4% in the most recent quarter.
Stock Repurchases: Apple has been aggressively buying back shares, and any signs of a slowdown in repurchases might suggest internal concerns about the company’s increasingly lofty valuation.
Bernstein analyst Toni Sacconaghi took a close look at Apple’s stock performance in a research note Friday. He says the big story is really the re-rating of the stock—Apple’s price/earnings multiple on forward earnings has ballooned to 24 times from 13 times a year ago. Sacconaghi notes that investors have been driving up multiple for the market more generally—the increase is a little more modest on a relative basis.
As has been clear for months now, investors are looking out beyond fiscal 2020 to the arrival of 5G iPhones in the fall—Sacconaghi says many investors expect the 5G cycle to boost earnings by 20%-30%. And he adds that the growth in wearables has “affirmed Apple’s ability to innovate in non-iPhone categories,” and “given life to the bull case that Apple should trade more like a high-end consumer brand than a traditional tech hardware OEM.”
And he also notes one more factor: As Apple stock has grown more important to benchmark stock indexes, some portfolio managers have been buying the shares out of fear of underperforming the market. Nothing succeeds like success.
Write to Eric J. Savitz at [email protected]
