- Apple Inc. is scheduled to report its Q4 earnings on the 25th of October, after markets close.
- The report gains greater importance due to Apple's decision to withhold iPhone 7 weekend sales numbers.
- Will Apple surprise the street and see a post-earnings rally in the stock price?
Apple Inc. (NASDAQ:AAPL) is scheduled to report its Q4 2016 earnings after markets close on October 25th. Wall street expects the iPhone maker to report EPS of $1.65 on revenue of $46.55 billion. Apple stock has been in an uptrend for the last 6 months, after spending a good part of the first half on the way down. The stock has erased its losses in the first half, closing the last trading session at $117.06, a 10% gain in 2016 so far. Wall Street has been busy issuing price target hikes and rating upgrades. However, with the strong performance of the iPhone 7, will Apple Inc.'s latest flagship carry the tech titan over Wall Street estimates in its Q4 earnings report?
Bullish Investor Sentiment Is Lifting Apple Stock
Apple stock has been riding a wave of bullish investor sentiment even as analysts have been busy upgrading the stock and hiking price targets. After Stifel and Deutsche upgraded Apple stock on higher iPhone expectations, the flood of bullish commentary around the stock continued this week as Macquarie assigned the stock a $130 price target, in an investor note sent out on Wednesday. The Macquarie price target implies 11% upside to the last closing price for Apple stock (October 20). Wall Street currently has a consensus 'Outperform' rating on Apple stock with a $128.32 price target (up from $122 in July). The consensus price target has been rising through the past quarter, which has been mirrored by the rise in Apple stock price.
Wall Street Estimates For Apple Q4 Earnings Are Rising
Wall street consensus currently anticipates Apple to report Q4 EPS of $1.65 on revenue of $46.89 billion. The estimates imply a 15% drop in EPS and 8.9% drop in revenue compared to the year-ago quarter. While the estimates are lower, what's interesting is the speed at which these estimates have risen over the recent weeks. The consensus called for an EPS of $1.6 on revenue of $45.9 billion back in July, 3% and 2% lower than the current EPS and revenue estimates, respectively. The current earnings whisper expects Apple to report $1.75 in earnings, which implies a 6% earnings surprise. The recent bullish commentary and increasing earnings expectations from Wall Street have been driven by the strong performance of the iPhone 7. With Apple withholding the first weekend sales following the latest iPhone launch, the performance of the iPhone segment will be even more closely watched.
iPhone 7 Will Drive Overall Profit Margins Higher
In the latest report surrounding the iPhone 7, data from Consumer Intelligence Research partners (CIRP) reveals that the iPhone 7/7 plus accounted for 43% of iPhone sales in the September quarter. All of this in just 2 weeks of availability in the quarter. Quoting Josh Lowitz, CIRP co-founder:
In a quarter with only two weeks’ of sales, iPhone 7 and 7 Plus grabbed significant share of iPhones sold. We attribute this to slow iPhone sales in the weeks leading up to the launch of these two new models, as well as a positive reception for the new 7 and 7 Plus models.”
The impact of the higher percentage of iPhone 7 family in the overall iPhone mix will drive the top line as well as margins higher, as ASPs on the latest models are usually significantly higher than those of the older models.
Apple Earnings History
Apple has delivered an earnings surprise in 3 of its last 4 earnings reports, with an average earnings surprise of 0.9% over the last 4 quarterly reports. Apple stock price has dropped, following earnings, in 2 of the last 4 quarters. Hence, a surprise or beat will not be enough to guarantee a post-earnings rally, and a lot will depend on the future guidance and investor expectations.
Is Apple Setting Up For A Huge Beat?
Wall Street currently anticipates iPhone sales in the range of 40M to 46.2M units. Analysts at Stifel and Deutsche recently raised their expectations to 47M and 46M, respectively. Given the encouraging news coming from the leading carriers and continuous reports of strong iPhone 7 sales, iPhone unit sales should come in at the higher end of Wall Street estimates. As highlighted in our recent Apple post, we anticipate the iPhone segment to contribute $30.8 billion in Q4 revenue, making up 62.5% of Apple's overall Q4 2016 revenue. This puts our overall Q4 revenue estimate at $47.36 billion, which implies a 1% revenue beat. Based on Apple's Q4 guidance and our expectations for profit margin expansion due to the favorable iPhone product mix, we anticipate Apple to report Q4 EPS of $1.75, implying a solid 10 cent EPS beat.
|in Billions of $||Q4 2016 (E)|
|Income before tax||12.7|
|Provision for taxes||3.2|
|Number of Shares||5.4|
Source: Apple Q4 guidance, Author estimates
Apple Q4 2016 earnings are scheduled to be released after the market close on October 25. Wall street consensus expects the iPhone maker to report EPS of $1.65 on revenue of $46.9 billion. However, due to the strong iPhone sales and the favourable product mix towards greater iPhone 7 sales, we anticipate Apple Inc earnings to come in at $1.75 on revenue of $47.4 billion, implying a 6% earnings surprise, which will be the biggest earnings surprise the company has delivered in the last 4 quarters. Hence, Investors looking for short-term gains should buy Apple stock in order to benefit from a highly likely post-earnings rally in the Apple stock price.
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