- Apple will report its Q1 2016 earnings next week.
- Recent reports of a potential decline in iPhone and China sales triggered a sharp sell-off in the last few weeks.
- iPhone sales and China growth will be in focus, as well as iPad/Mac sales, and Apple watch growth.
- Leading sell-side shops upgraded Apple ahead of earnings. Could Apple stock change its course?
Tech giant Apple (NASDAQ:AAPL) is expected to report its fiscal year 2016 Q1 earnings next week on Tuesday, January 26, amidst the negative sentiment in the market towards the company. For a long time, Apple was Wall Street’s darling with impressive stock price rises, top line growth, attractive buyback plan and an enormous pile of cash. However, in the recent couple of months, sell-side attitudes towards Apple started to change.
It began with Credit Suisse’s report that Apple is downsizing its components orders by at least 10%. The report was prepared by aggregating financial and operational information from the leading suppliers like Qualcomm (NASDAQ:QCOM),Skyworks Solutions (NASDAQ:SWKS), Dialog Semiconductors, Cirrus Logic (NASDAQ:CRUS), and Qorvo (NASDAQ:QRVO). Credit Suisse’s reports was followed by similar reports from Nikkei and WSJ, suggesting Apple will present a decrease in iPhone sales in its next earnings release based on aggregated data from Apple’s suppliers.
This mood change towards Apple, together with the overall weakness in the market, resulted in a negative return for the tech giant’s stock in 2015 when it ended the year down by 4.6%. It was the first year, since 2008, that Apple stock yielded a negative return (60% in 2008), which increased investors’ concerns of deepening crisis in Apple that accelerated stock price decline.
On top of lower estimates for the iPhone sales, the slowdown in the Chinese economy triggered concerns that Apple’s growth driver might be impacted, and the sales growth there might be halted. However, as I outlined in an earlier article, I believe that Wall Street’s mood shift towards Apple is premature and short-sighted. The company still has a solid balance sheet, strong P&L, and plenty of new initiatives in the pipeline, targeted to maintain its growth over the next few years.
As it usually does, Apple started to publish the quarterly results of businesses, which are usually excluded from the final earnings result metrics to provide some more color about Apple’s smaller initiatives. The first report was Apple’s app store performance that generated a total of $20B in sales (split between Apple and developers) in 2015 alone, which is 50% of the total sales amount that the app store had generated since 2008.
The second report was made through a Financial Times article stating that Apple’s paid music streaming service -- Apple Music – reached more than 10 million subscribers which is an impressive increase from the 6.5 million in October. Apple Music reached 50% of Spotify’s customer base in only seven months since it was officially launched, whereas for Spotify, it took six years to reach the 10 million subscribers milestone.
While some sell-side shops present a very negative view of Apple, others like Mizuho Financial (NYSE:MFG)), Deutsche Bank (NYSE:DB), Bank of America (NYSE:BAC), UBS Group AG (NYSE:UBS), Oppenheimer, and more upgraded Apple stock or maintained a buy rating ahead of next week’s earnings. Most sell-side analysts believe that the market overreacted to the sales slowdown reports and even though some of them have slightly reduced Apple’s price target, the mean PT of $142 is considerably higher than current Apple stock price. Following the market concerns on Apple’s performance, there are focus areas the market will pay attention to:
- iPhone sales in Q1 2016 and guidance for the full year – determine whether the slowdown reports are correct.
- China growth – could Apple maintain its previous growth rates in China even though the local economy faces headwinds.
- Smartwatch sales – Apple has not yet released any official data, IDC estimations are significantly below expectations. Could Apple improve that trend as we are getting closer to the generation 2 release?
- iPad sales – iPad sales figures decline despite Apple's attempts to turn it around. Could Apple change this trend in 2016
These are the comparable figures to watch in this earnings:
|Q1 2016 Consensus||Q1 2015 Actual||2016 Consensus||2015 Actual|
Apple will report its fiscal 2016 Q1 earnings next Tuesday in the midst of the negative sentiment towards the company and stock recently. Reports of a potential slowdown in iPhone sales and Apple’s growth in China triggered a sell-off in Apple stock (supported by the overall weakness in the market) which brings Apple to its earnings with a lot to prove to the market. Of course, iPhone sales in 2016 and growth in China will be in focus.
However, investors are also waiting to see how the iPad, Mac, and others will impact Apple’s 2016 and whether the company finally reveals watch figures. A number of prominent investment firms like BoFA/ML, Deutsche, UBS and more upgraded Apple stock ahead of earnings with positive outlook expecting the company to dismiss most of the gloom and doom sentiment about its growth.