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Don’t Expect Fireworks From Today’s Apple Inc. (AAPL) Earnings

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The bull/bear argument over Apple Inc. (NASDAQ:AAPL) stock has been won by the bulls so far this year. AAPL stock is up 29% year-to-date, and reached an all-time in May before a recent pullback. But I don’t expect Apple earnings on Tuesday afternoon to change the argument much.

Don't Expect Fireworks From Today's Apple Inc. (AAPL) Earnings
Don't Expect Fireworks From Today's Apple Inc. (AAPL) Earnings

Source: Apple

I thought much the same coming out of the company’s Q2 earnings report in early May. Obviously, the iPhone is key to Apple earnings. But with the iPhone 8 (or X) on the horizon, bulls and bears likely will look past iPhone unit figures for the quarter. And while the company has shown some improvement in non-iPhone sales, over the long run those revenues have been stagnant. For years now, AAPL stock largely has been a play on the iPhone.

As such, I don’t expect much in the way of movement out of Apple earnings this week — at least based on the numbers. There will be interest in Apple’s commentary — but the real tussle over AAPL stock won’t begin for a few more months.

Expectations For Apple Earnings

Analysts are expecting double-digit EPS growth for the fiscal third quarter, with consensus at $1.57 against $1.42 a year ago. It’s worth noting, however, that the EPS growth implies only a modest increase in pre-tax profit. Q2 EPS rose a similar amount, but due almost solely to share repurchases and lower taxes. Street estimates project 6% revenue growth year-over-year, and at $44.9 billion is toward the higher end of Apple’s guidance of $43.5 billion-$45.5 billion in sales.

Given that Apple traditionally guides to the conservative side, those estimates don’t seem terribly difficult to reach. But in terms of how AAPL stock will react to Apple earnings, the overall numbers coming from Cupertino will be less important than how the company hits them.

Services revenue will be one closely watched figure. Apple CEO Tim Cook has set a target of $50 billion in services revenue by fiscal 2020. Q2 showed the highest revenue ever in that category, and grew 18% year-over-year. With Services revenue being both higher margin and more stable than hardware sales, another good quarter in that category could help the bull case for AAPL stock. But at ~13% of total sales, Services alone isn’t enough to move the shares.Chinese demand, a recent concern, will be another figure of interest.

 

Still, in China, as in the U.S. market, AAPL bulls likely will attribute any weakness to consumers waiting for the next-generation iPhone. It’s tough to see either Chinese or U.S. sales changing investors’ minds, barring a major miss, or beat, relative to expectations.

In fact, the numbers in Apple earnings themselves probably won’t be the focus of investor attention. Rather, it will be the Apple earnings call that seems likely to define the post-earnings narrative.

What Will Move AAPL Stock

What every AAPL investor wants out of Apple earnings is an update on the next iPhone. Reports continue to swirl that the iPhone 8 will be delayed — with the launch of the iPhone 7s possibly coming in late as well.

Confirmation of a delay could rattle AAPL stock. If the full launch is pushed further into the holiday season that could give a leg up to rival Samsung Electronics (OTCMKTS:SSNLF), which is reportedly is launching its new phone in later this month. And it’s possible that near-term sales could slow, as Apple fans hold off on upgrades while waiting for the next version.

But it certainly seems like AAPL bulls are well aware of that outcome. Even bullish analysts are expecting Apple to guide low for fiscal Q4, due to likely delays. Those analysts, however, think the long-term case for AAPL stock will win out.

Apple Stock Should Stay Stuck

That very well may be true, though I continue to have concerns about that long-term case. The continuing disappointment in China seems like a potential headwind to overall growth. Services aside, the non-iPhone part of Apple’s business isn’t really growing, as higher watch sales are offset by continued declines in the iPad and other older products. And while I don’t think Apple is the next BlackBerry Ltd (NASDAQ:BBRY), the risk of longer upgrade cycles and smartphone commoditization remains very real.

AAPL stock could still be pricing in some of those risks. But until the next iPhone is (finally) released, the argument over how real, and how substantial, those risks are will persist. And until that release comes, I’d expect AAPL stock to stay roughly in its current range.

As of this writing, Vince Martin has no positions in any securities mentioned.

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