Apple AAPL  is set to report third-quarter fiscal 2019 earnings on Jul 30.

Notably, the company beat the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 4%.

Apple’s fortunes are tied to iPhone, which is by far its biggest revenue contributor. The device accounted for 53.5% of net sales in the last reported quarter, wherein sales declined 17.3% from the year-ago quarter to $31.05 billion.

For third-quarter fiscal 2019, revenues are projected between $52.5 billion and $54.5 billion. The Zacks Consensus Estimate for revenues is pegged at $53.31 billion, almost in line with the year-ago quarter’s reported figure.

Moreover, the consensus mark for earnings is currently pegged at $2.12 per share, unchanged over the past 30 days. The figure indicates a 9.4% decline from the figure reported in the year-ago quarter.

Apple Inc. Price and EPS Surprise

Apple Inc. price-eps-surprise | Apple Inc. Quote

iPhone Sales Estimated to Decline in Q3

Apple’s iPhone sales are expected to remain subdued, due to lower upgrades, sluggish demand in Greater China, stiff competition from Chinese handset makers and the ongoing U.S.-China trade tussle.

Per a Bank of America Merrill Lynch report, cited by The Telegraph, the U.S.-China trade war and the resultant retaliatory tariffs might have resulted in an “informal boycott” of Apple and other U.S. products.

Moreover, per CNBC, Chinese consumers are favoring local brands, particularly Huawei, post the U.S. restriction on the Chinese tech giant.

These factors might have negatively impacted iPhone sales in the to-be-reported quarter.

Notably, Apple and its retailers have lowered iPhone prices in China. The company has also inked partnerships with local banks as well as Alibaba’s BABA division, Ant Financial, to offer interest-free financing for iPhone, per TheStreet.

However, we don’t expect the move to positively impact sales due to stiff competition from Chinese handset makers. These companies are offering top-quality hardware and innovative features in their devices in the premium smartphone market ($500-$800 price range). The significant price-gap between these devices and iPhone has negatively impacted Apple’s market share.

Furthermore, Apple is suffering from its failure to penetrate the rapidly growing but price sensitive markets of Asia, particularly India. The steep pricing of new iPhones made it difficult for Apple to gain market share in India, where Chinese smartphone makers like Xiaomi dominate.

Reportedly, Apple is contemplating to move 15-30% of production out of China and has discussed alternative locations with its suppliers. The company apparently specified that Mexico, India, Vietnam, Indonesia and Malaysia are preferred locations, with India and Vietnam being favorites for smartphones.

The Zacks Consensus Estimate for iPhone sales stands at $26.07 billion, indicating 12.8% decline from the year-ago quarter’s reported figure.

Apple Music & App Store Growth to Aid Services

The Services segment has become the new cash cow for Apple. The company is expected to grow on increasing popularity of App Store and growing subscriber base of Apple Music.

App Store’s growth can be attributed to a strong developer base and the richness of the apps. Apple is encouraging developers to use AI and machine learning in their apps. Moreover, the company’s endeavor to open up its ecosystem through partnerships with the likes of Samsung (for iTunes) and Amazon AMZN is a positive for the Services segment.

Further, Apple Music’s availability on Amazon Echo devices and Fire TV is helping it expand footprint and compete better with Spotify SPOT.

Although Sweden-based Spotify is leading at the moment, Apple Music too is catching up fast. The service now has more than 60 million subscribers, which trails Spotify’s 100 million premium subscriber count.

The partnership with Verizon VZ is also noteworthy in this regard. The tie-up has made Apple Music available for free to the U.S. telecom giant’s customers, who subscribed to the plans — Beyond Unlimited and Above Unlimited.

Moreover, Apple’s collaboration with American Airlines has enabled Apple Music subscribers access the streaming app on flights, without having to pay for in-flight Wi-Fi.

These partnerships and tie-ups are having a positive impact on the company, reflected by the rapidly increasing subscriber base. The consensus mark for Services revenues stands at $11.70 billion, implying 22.5% growth from the year-ago quarter’s reported figure.

Currently, Apple has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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