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The iPhone X won’t usher in anything close to a “supercycle” of phone upgrades like the iPhone 6 did in 2015, as Apple investors had hoped, but that hasn’t stopped the hand-wringing about exactly how many iPhones Apple will sell this fiscal year.
Clearly iPhone X demand remains a focus for Wall Street heading into Apple’s fiscal second-quarter earnings report, due after the bell on Tuesday. Apple shares have been dinged in recent days by perceptions of weakness in the Apple supply chain, and iPhone unit-sales estimates have been crawling steadily lower since late last year.
“Investors are squarely focused on the health of the iPhone business, as supply chain data increasingly points to weakness,” wrote Bernstein analyst Toni Sacconaghi, who rates Apple shares at market perform with a $170 target price.
Among the data points causing concern for Apple’s iPhone sales is a weak June-quarter outlook from Taiwan Semiconductor Manufacturing Co. Ltd. Sacconaghi’s broader analysis of suppliers prompted him to lower his second-quarter estimate for iPhone unit sales to 51 million for the second quarter and 38.8 million for the third quarter, below consensus projections for 42 million.
Consensus estimates call for 53 million iPhones sold in the second quarter, per FactSet, down 15% from the 62 million analysts were projecting for the period when 2017 ended.
Apple is becoming gradually less dependent on iPhone sales for its results, however, and that has other analysts pointing out that Wall Street’s iPhone X obsession may be misguided.
“We think muted iPhone units are now well understood on the Street and baked into the stock price,” wrote RBC Capital Markets analyst Amit Daryanani, who rates the stock at outperform with a $203 target price. “The focus on Apple, going forward, should shift primarily to capital allocation and services. We think Apple has the potential to positively surprise on both fronts.”
Services revenue is a key reason why Apple managed to beat Wall Street’s earnings and revenue estimates last quarter despite a sizable miss on iPhone unit sales. Analysts expect 19% year-over-year growth for the segment this time around and will be looking for the company’s commentary on fast-growing areas like the App Store and Apple Music, as well as newer efforts to drum up services business. These include the planned purchase of music-recognition app Shazam, currently being examined by European regulators.
A bump in average selling prices also helped drive Apple’s strong results last quarter and will remain a key area to watch for the March period. Apple’s iPhone X might not be selling as well as initially expected, but its $1,000-plus price tag provides a nice boost to the top and bottom lines nonetheless. The iPhone 8 and 8 Plus, starting at $699 and $799, respectively, also give Apple a lift.
Of note will be whether customers are opting for these new models or choosing cheaper, older versions instead. Analysts tracked by FactSet expect that average selling prices grew 13% from a year earlier, to $742.
Here’s what to expect
Earnings: Analysts surveyed by FactSet estimate that Apple earned $2.69 a share for the March quarter, up from $2.10 a year earlier. According to Estimize, which crowdsources estimates from hedge funds, academics, and others, the average projection calls for $2.73 in adjusted EPS. Apple has beaten EPS expectations in all but one quarter since the start of 2013.
Revenue: The average revenue estimate according to FactSet calls for $61 billion in sales, while the Estimize consensus projects $62 billion. The company generated revenue of $53 billion a year prior., and projected revenue of $60 billion to $62 billion
Analysts expect that Apple brought in $39 billion from iPhone sales and $8.3 billion from services sales, per FactSet, up from $33 billion and $7 billion for the March 2017 quarter.
Stock movement: Apple shares have gained following five of the company’s last 10 earnings reports. The stock is up 14% over the past 12 months, compared with a 16% rise for the Dow Jones Industrial Average of which Apple is a component. Shares are down 3% so far in 2018, while the Dow industrials are down 1.6% and the S&P 500 index is off 0.3%.
Of the 40 analysts who cover Apple’s stock, 25 have buy ratings and 15 have hold ratings, according to FactSet. The average price target is $192.84, 17.4% above current levels.
What else to watch for
Apple’s March-quarter earnings will also bring an update on the company’s capital-return program, which has the potential to move its stock.
Apple has vowed to become net-cash neutral “over time,” meaning the company has some $160 billion to spend. Despite some investors’ hopes of a big acquisition, Apple’s commentary and history indicate the company is likely to return most of that money to shareholders.
Last year Apple added $50 billion to its capital-return program, bringing the total to about $300 billion through March 2019. Expectations for this year, with all that overseas money coming back to the U.S., are much higher.
“We expect Apple to announce a $150 billion increase to its total capital return program,” Morgan Stanley’s Katy Huberty wrote of her predictions for the current update. That would bring the cumulative total to $450 billion through 2020. Huberty rates the stock overweight with a $200 target.
Apple will hopefully decode what “over time” actually means in terms of the company’s aim to become net-cash neutral over some still-unknown time period.
The company’s China business will also be in focus. Apple showed a bit of momentum in China during the last two quarters, but some analysts are skeptical that a recovery is under way.
“With Hong Kong shrunk and mainland China fairly flat, we no longer see China as a driver of significant iPhone growth,” wrote UBS analyst Steven Milunovich, who rates the stock a buy with a $190 target. “We now expect flat China units and little long-term growth.”
Concerning Milunovich is that Huawei presents formidable competition on the high-end side, while local players have an edge in lower-tier cities. That’s in part because these local companies have better distribution avenues and their phones have newer features than the older-generation iPhones that tend to be price competitive in midtier markets.
“Apple only seriously competes at the high end of Tier 1 and advanced Tier 2 cities,” Milunovich wrote, which he said amounts to between 200 million and 300 million people.
Morgan Stanley’s Huberty also sees troubling signs in China, which is one reason why she urged caution ahead of the earnings report.
“China smartphone activation data points to a reversal in Apple share trajectory with losses through March that presents a meaningful headwind in the largest smartphone market,” Huberty wrote.
Finally, look for commentary on other pieces of hardware. It’s unlikely that the company will finally break out Apple Watch data, but you never know—after all, Amazon.com Inc. disclosed approximate Prime membership counts for the first time last week. Otherwise, look for commentary on Watch momentum, as well as updates on how new, lower-priced iPads are being received.
There’s also the company’s HomePod speaker, which went on sale in the middle of the quarter. The device is considerably more expensive than those made by competitors, and it arrived years after Amazon and Alphabet Inc. launched their own smart speakers. It will be interesting to hear Apple’s update on traction for the speaker.