Apple earnings preview
The Q4 results from Apple are never the most important, but
as ever they will contain key guidance on the next quarter’s expected iPhone
sales and wider performance of the company.
The Street expects EPS of $2.84, short of the
$2.91 in the same quarter a year ago, on revenues of $62.9bn, flat on last
year, which was a record. In the last update, investors were
particularly impressed by robust Q4 guidance which was ahead of the Street’s
expectations. Apple guided revenue to between $61bn and $64bn versus
expectations of $60.9bn prior to the Q3 report. The Q3 numbers broadly
showed that consumers are still extending the upgrade cycle and holding on to
iPhones longer but stickiness in the Apple ecosystem remains strong. The 13%
growth in Services was a disappointment and represented another
quarter of deceleration. However, excluding a couple of
one-off items, the growth was more like 18%, according to Tim
Apple has beaten EPS expectations every quarter for the
last two years. Wall Street analysts have been consistently upgrading their
expectations for the stock and raising price targets over the last quarter.
What to watch
Number one is the guidance
for the 2020 fiscal first quarter. This is pivotal to our understanding of how
well Apple thinks the iPhone 11 is doing – there is only 10 days of iPhone
sales included in the Q4 release. The recent strong performance of the stock
reflects increased confidence in the iPhone 11 as well as growing hopes for
next year’s expected 5G phone. The iPhone 11 has done way better than expected
before its launch. We’ll get a first glimpse of
iPhone 11 sales in Q4 – the market is expecting Apple to sound bullish on
demand for the forthcoming holiday quarter.
Given the backdrop of slowing growth in China, Hong Kong protests
and the Sino-US trade war, investors will be watching for the Greater China
sale with interest. This has been a problem area for Apple but there have
been more encouraging signs, particularly with the lower priced iPhone 11
catching the interest of Chinese consumers. Investors will also want an update
on how potential tariffs will impact the business.
Services revenues will be another key area as Apple looks
to pivot towards this side of the business. Growth in Q3 was modest versus
comparisons from last year, although that was down to one-off items. However,
the launch of a range of new services like Apple TV+ should underpin further
growth, albeit not so much in the reported period. Key to the rerating of the
stock and to support the higher multiples we’ve got now is for this division to
On that front we are also looking at margins. Services makes
up about 20% of Apple’s revenue, up from c16% a year before. Margins from
Services is around 64%, vs roughly 31% for hardware. The question is at
what point can Apple start to significantly guide its margins higher? As we
said in July: “This could be an area for an upside surprise, if not now then
perhaps heading into the year-end.” Apple has guided gross margin between
37.5% and 38.5% for Q4.
Also expect strong performance in Wearables, which now account for
about 10% of sales. Mac sales may be a touch softer due to supply problems.
The stock has rallied
through the $240 mark to break new all-time highs although it’s seemingly
hit resistance at the $250 round number. The stock has rallied about 8% since
it released its new iPhone range – this may be an indicator the market is
expecting upgraded guidance off the back of higher-than-expected iPhone
sales. A strong Q4 is already priced in.
Indeed, we may add that earnings multiples appear
stretched. The trailling 12-month PE ratio has risen above 20 versus an
average of 15 over the last 5 years. Whilst there may be encouragement that
this is about a re-rating of the stock as it pivots away from being a hardware
business to a services business, it makes it ripe for sellers on any
miss, although Tuesday’s selloff helps on that front.
Downside break could see $232 retested. Upside look for the $250 level as the barrier to further gains.