Apple heads into its June quarter earnings report, due after the close on Tuesday, surrounded by a cloud of investor concerns—which could be a great setup for a leg up for the world’s second-largest company by market capitalization.
One of the great growth stories of all time, Apple (ticker: AAPL) lately has been shrinking. In the March quarter, revenue of $58 billion were down 5% year-over-year, and profits were off 10%. One key issue is that Apple iPhones sales have softened, due to a combination of weaker demand in China, where the company has been hurt by the ongoing U.S./China trade spat, and by consumers holding back on new phone purchases ahead shiny new models to come. Apple reported a 17% drop year-over-year in March quarter iPhone revenues. The September 2019 iPhone product cycle is expected to bring only modest hardware upgrades, with the arrival of speedier 5G phones not expected until fall 2020.
Meanwhile, investors are eager to see results from the company’s accelerated push into services. Services revenue were up 16% in the March quarter—but that’s ahead of the rollout of key new services announced earlier this year, including the Apple TV+ streaming video service and the Apple Card credit card to be launched in partnership with Goldman Sachs.
For the quarter, Wall Street analysts are expecting fiscal-third-quarter revenue of $53.3 billion, with earnings of $2.09 per share. Apple’s own guidance called for revenue in the $52.5 billion-$54.5 billion range, gross margins of 37%-38%, operating expenses of 8.7%-8.8%, other income of $250 million, and a tax rate of 16.5%.
For the September quarter, Street consensus calls for revenue of $60.98 billion and EPS of $2.66.
In addition to the focus on services and iPhone sales, investors will be looking for an update on the state of the company’s business in China and the Trump administration’s irritation with Apple’s plan to build the Mac Pro in China rather in the U.S. They’ll also be looking for details on the financial impact of the pending acquisition of Intel ’s (INTC) modem business, reaction to the news that the Department of Justice has begun looking into the power of large tech-platform companies, and growing scrutiny of the company’s 30% commission on App Store sales.
UBS analyst Timothy Arcuri on Monday says conversations with investors suggest there are low expectations for the quarter and for the fall iPhones, with particular concerns around both China and services growth. That said, he repeated his Buy rating on the stock, lifting his price target to $235, from $225, noting that many investors are willing to look at past the 2019 phone cycle and looking ahead to what should be a stronger cycle in 2020 with the arrival of 5G phones.
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JPMorgan analyst Samik Chatterjee, who has an Overweight rating and $239 target on the stock, writes that bears expect continuing trade concerns to drive software earnings and outlook, while bulls are encouraged by the potential for upside surprises in iPhone shipments.
Chatterjee says that recent supply chain checks point to abating headwinds, and potential upside to investor expectations for the September quarter.
Morgan Stanley’s Katy Huberty wrote in a research note last week that negative investor sentiment despite improving iPhone and Services data points, and low expectations for the September quarter make for a “positive setup into earnings.” She repeated her Overweight rating and lifted her target price to $247 from $231. Huberty writes that there is a “clear catalyst path beyond earnings” that makes the Apple stock a top pick for the second half of the year.
Wedbush analyst Daniel Ives, who maintains an Outperform rating and $235 target price, says his own checks find “stable iPhone demand globally heading into the crucial September quarter with some puts and takes that overall we would characterize as better than feared in light of a very noisy time for Cupertino.” He adds that the Services business remains a “linchpin” for Apple’s valuation—he thinks that business is worth $400 billion to $450 billion and is still in the early days of being monetized. “While China remains a wild card,” he writes, “we are bullish on Apple’s future heading into FY20 and beyond.”
Apple on Monday morning is up $1.61, or 0.8%, to $209.35.
Write to Eric J. Savitz at eric.savitz@barrons.com
https://www.barrons.com/articles/apple-reports-earnings-tuesday-heres-what-to-expect-51564412975
2019-07-29 15:09:00Z
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