Bidness Etc

BidnessEtc previews Apple’s third quarter earnings, shedding light on historical performance as well as rounding up what’s in store for the June quarter results

Apple Inc. (AAPL) shares have surged 20% this year, while the iPhone lineup continues to reign as the world’s top selling smartphone. Despite the promising sentiment, and its attractively cheap valuation, Apple shares have been range bound for a large part of the year, hovering around the $120 - $130 band for the last three months. All this while analysts expect the stock to reach $150 in twelve months. The publication of the company’s third quarter earnings results tonight, after the markets close, could play a crucial role in getting it there.

Consensus

In the quarter ended June 30, analysts forecast a 32% rise in Apple’s revenues to $49.30 billion and an adjusted earnings per share (EPS) of $1.81, up 41% from a year ago.

The company has guided for revenues of between $46 billion and $48 billion. Gross margin guidance is between 38.50% and 39.50%, while the outlook for operating expenses was placed in a range between $5.65 billion and $5.75 billion. In the last eight quarters, Apple has managed to exceed analysts’ revenue projections seven times without missing an EPS estimate. With such a promising track record and sturdy fundamentals, many expect Apple to outperform again this quarter driven by robust iPhone sales.

iPhone

Apple’s highly successful iPhone 6 refresh from last year has substantially helped the company to outrun iPhone estimates in the last two quarters. The company sold 61.20 million iPhones, compared to the quarterly estimate of 55 million. Shipments for the June quarter are calculated to clock 46 million units. Apple typically sells the bulk of its iPhones in the first two quarters. Sales tail off in the last two quarters in anticipation of a newer version in the fall. The iPhone 6 average sale price (ASP) is expected to arrive at $636.

Much like his colleagues on the analyst circuit, Piper Jaffray’s Gene Munster last week reconfirmed the strength of this quarter’s iPhone demand. The finding is based on a survey of iPhone resale values. The result is that iPhone 6 and 6 Plus are reselling at a higher value than their predecessors, iPhone 5C and 5S.

China remains the bright spot. In the last quarter, revenues from that market exploded by 71% to $16.80 billion, 29% of overall sales, driving the iPhone deliveries outperformance. Skeptics have recently pointed out that turmoil in China’s markets, and a slowing economy, could put a damper on iPhone sales this quarter, which could lead to a surprise miss on iPhone projections. Those risks appear remote.

Watch

Any details on sales of the Apple Watch in its first complete fiscal quarter will be closely analyzed by Wall Street. The Watch is essential to Apple’s long term story. Amid reports that sales have recently fallen off a cliff after its initial success, many have dismissed the device for its lack of a killer app. Others see it as the next step in mobile computing, and are less dismissive.

However, doubts started to emerge when Apple failed to provide Watch sales numbers in its last conference call. CEO Tim Cook was keen to point out that demand for the Watch is more than supply, sparking speculation that a perceived slowdown in its sales can be linked to supply shortages.

Analysts can’t seem to agree. Estimates for Apple Watch shipments vary within a range of 3 million to 6 million units. If management reports Watch sales, and its margins, analysts would have a much clearer future growth model, allowing more accurate projections for the wearable’s impact on earnings in future quarters.

iPad

It is becoming clear that the waning iPad sector is an area that may need considerable attention. Sales have consistently declined in the past quarters with its share of overall revenue receding. iPad shipments in the June quarter, are forecast to fall 16.50% from last year to 11.10 million units. March quarter iPad revenues dived 29% year over year (YoY), with the tablets now making up 9% of total sales, down from 17% only a year ago.

Many analysts claim with conviction that the iPad market has plateaued, with global tablet sales stumbling in the face of large screen smartphones. If that trend intensifies this quarter, investors would want Apple to explain its future iPad strategy.

Mac

Alongside iPhone, Apple still dominates growth in the high-end PC market, with robust sales of the Mac far outpacing the decline in global PC sales. In the last quarter, the Mac lineup generated revenues of $5.60 billion (up 2% from a year ago). This time around, it is calculated that Mac shipments will come in at 4.95 million units.

In a recent research report, KGI Securities analyst Ming-Chi Kuo pinned Mac sales growth for the June quarter to the release of new Macbook models. The analyst further thinks that Mac revenues will continue to grow as Apple hits the market with new lineups equipped with upgraded CPUs later this year.

Conclusion

In tonight’s earnings results, a clear sign that iPhone sales are not peaking, and future earnings are intact would lead the shares to a higher multiple, with the stock expected to break its previous high ($134.06), and even cross the $140 mark. Any signal that iPhone sales may be in for a rough patch could send the stock tumbling.

The Street is firmly bullish (40 Buy calls, 13 Hold calls and two Sell calls) ahead of the earnings, in line with investor sentiment. Shareholder confidence is also pegged with Apple’s capital returns program that served as a major positive catalyst last quarter when dividends jumped by 11% and share buybacks were boosted by $50 billion. It also remains to be seen as to what Apple has in the bag this quarter, especially what it intends to do with its $194 billion cash pile.