Apple Inc (NASDAQ:AAPL) stock is rallying ahead of earnings. iPhone X will be the key focus.
Shares of Cupertino based iPhone maker Apple Inc (NASDAQ:AAPL) are rallying ahead of the Q4 FY 17 earnings report. Apple Inc is scheduled to report its much anticipated fourth quarter FY 2017 earnings on Thursday. The rally is partly driven by the strong performance of other "FAANG' stocks such as Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) and partly by the positive news around iPhone X pre-orders. For the year, Apple stock is up over 43%, mainly driven by the hopes of an iPhone Supercycle. To sustain the stock rally, Apple needs to deliver strong earnings report and more importantly a strong guidance.
Can Apple Inc deliver an earnings beat?
Analysts expect Apple Inc to report a non-GAAP EPS of $1.87, a YoY growth of 24.67% over the last year same quarter earnings. This is also higher than last quarter EPS of $1.67. On the top line front, Wall Street expects Apple to report revenues of $50.7 billion, representing over 8% YoY growth. The revenue expectation is towards the lower end of the company's guidance range for revenues of $49 billion and $52 billion, with midpoint of the range at $51.5 billion. One reason for the low revenue estimate could be the weak performance of Apple's iPhone 8 and iPhone 8 plus.
Given the company's last quarter performance and strong performance delivered by other tech giants, many expect Apple Inc to deliver another earnings beat. The so-called earnings whisper number is also indicating a beat. As per the whisper number, Apple will report a non-GAAP EPS of $1.93, 6 cents higher than Wall Street consensus. Even Estimize estimate also indicates an earnings beat. However, more than the earnings beat (or miss) the post-earnings action in Apple stock will be driven by the company's commentary on its latest iPhone models and the next quarter guidance.
iPhone X will dominate the earnings.
Apple launched three new models of iPhone in the fourth quarter, along with a host of other products. While the iPhone 8 and iPhone 8 Plus were available for shipment in the previous quarters, iPhone X will start shipping only from the next month. Fourth quarter earnings report will contain two weeks of iPhone 8 sales, which going by the media reports and analysts commentary is not likely to be a great number. The initial response, especially in Asia was not that great. Customers did not exactly line up for hours to pick up their latest iPhone like they use to do before. So iPhone 8 sales are likely to be tepid.
However, this may not be as bad a news as it seems. Analysts are attributing the tepid iPhone 8 sales to higher consumer demand for the flagship iPhone X. And going by the recent reports, this could be a strong possibility. Within minutes of Apple opening pre-orders for iPhone X, delivery times had pushed out to as long as six weeks. In a statement, Apple said that "We can see from the initial response, customer demand is off the charts."
Strong demand for iPhone X could give a major boost to Apple's profit margins. iPhone X starts at $999 for a 64 GB model and 256 GB version costs around $1149. According to a survey conducted by RBC Capital Markets, more than half of the respondents who indicated an intention to buy the iPhone X said they’d choose the option with the higher storage, meaning higher ASPs for Apple. However, there are concerns that iPhone X will be so expensive to build that despite higher prices, the margins may take a hit. Investors must keep an eye on the gross margin guidance for the next quarter. For the current quarter, the company expects gross margin to come in between 37.5% and 38%, lower than previous quarter's gross margins.
Other factors to watch out for.
While iPhone X is likely to dominate the earnings call, investors will be also looking at the company's services segment, which is already larger than some Fortune 100 companies and is growing fast. The services segment includes revenue from AppleMusic, AppleCare, Apple Pay, licensing and other services. And this segment is growing at a rapid pace. Services revenues have grown at a CAGR of around 23% per year over the last five years. Further, this segment will continue to grow at a rapid pace for years to come. In fact, last May, Tim Cook had said that he expected the Services business to double by 2020, which would mean a CAGR of 18% till 2020. Moreover, this is a very high margin business segment. According to an estimate by Piper Jaffray, the services segment has a gross margin of around 60%.
iPad sales too will be under scanner. For the first time since 2013, iPad sales registered year on year growth in the previous quarter. And according to research report quoted by the management during the earnings call, among those planning to buy tablets, purchase intent for iPad was over 70%. The pick up in iPad sales bodes well for Apple. Investors will also be listening to management commentary on Apple Watch Series 3, which the company had launched with the latest bunch of iPhones.
Apple stock will be driven by next quarter guidance.
Apple stock has gained over 50% in the last one year on the hopes of an iPhone Supercycle. And going by the response towards iPhone X, we are likely to get one. However, as is well known, Apple is facing several bottlenecks when it comes to iPhone X production. Hence investors will do well to keep an eye on the management's commentary around the supply side bottlenecks and guidance for the first quarter of FY 18. Post-earnings price action in Apple stock will be driven by Q1 guidance and commentary around iPhone X. A weak guidance could lead to a correction. Given the recent rally, it is advisable to take a wait and watch approach.
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