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Thursday, March 28, 2024

Why All Eyes Will Be On Apple’s Earnings Report After The Close

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Shortly after the close today, Apple will report its much watched earnings which will be closely watched for several reasons. The biggest one is that since Q1 2014 AAPL has contributed 25% of the S&P’s 4.2% growth rate (excluding the EPS benefit of the company’s massive buyback program). Furthermore, roughly 40% of the nearly 9% jump in Tech margins since 2009 is attributable to Apple alone.

However, that was all in the past: this quarter Apple is actually forecast to subtract 0.7% from the S&P’s bottom line.

The reason: the iconic company is expected to report its first ever year-over-year decline in iPhone unit sales: at 50.7 million iPhone sold, this will represent a steep 17% drop from a year ago.

The slowdown in Apple’s iPhone sales has been documented here previously, both through channel checks, and most recently from media reports suggesting the company itself is dramatically slowing down production. This has been a bitter pill to swallow for the throngs of raving sellside analysts: most recently Raymond James analyst Tavis McCourt lowered his full-year outlook on iPhone sales to 212 million units earlier this week on “meaningfully lower” average selling prices

The consensus estimate is calling for iPhone unit sales of 217 million for fiscal 2016, compared to a record 231 million last year.

Worse, compounding these issues are signs people are upgrading their phones less frequently than they used to, a slowdown in demand in China, and expectations that the new iPhone 5SE and Apple Watch are selling below expectations.

Some other key observations: The current mean EPS estimate for the company for Q1 2016 is $2.00, compared to year-ago actual EPS of $2.33. If Apple reports a year-over-year decline in EPS for Q1 2016, it will mark the first time the company has reported a year-over-year decline in EPS since the calendar third quarter of 2013 (fiscal fourth quarter of 2013 for Apple). However, while AAPL has posted declining EPS before, this will be the first time in which the company will also reported an annual drop in iPhone sales.

As Factset adds, as a result of the decline, Apple is expected to be the largest contributor to the blended earnings decline for the Information Technology sector for Q1 2016. The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the Information Technology sector is -7.4%.

Excluding Apple, the blended earnings decline for the sector would be -4.1%.

If Apple reports actual EPS equal to or below the mean EPS estimate for the quarter, it will mark the first time Apple has been the largest detractor to earnings growth for the Information Technology sector since the calendar third quarter of 2013.

And just like iPhones were a key driving force behind the profit growth of the S&P, now comes the payback: over the past three years on average, the iPhone product segment has accounted for nearly 60% of the total revenues generated by Apple. In four of the past five quarters, the iPhone product segment has reported year-over-year revenue growth in excess of 35%. However, last quarter (Q4 2015), the segment reported year-over-year revenue growth of only 7%. For Q1 2016, the segment is projected to report a year-over-year revenue decline of -18%. If the iPhone product segment does report a year-over-year decline in sales for the calendar first quarter, it will mark the first year-over-year decline in iPhone sales since FactSet began tracking sales for this product segment in the calendar fourth quarter of 2010.

Suddenly betting it all on ravenous iPhone demand does not seem like a brilliant idea.

Some other consensus expectations.

Revenue: sell-side analysts expect Apple to report revenue of $52.0 billion, according to FactSet, down from $58.0 billion in the same period last year. Contributors on Estimize according to Marketwatch, are forecasting revenue of $51.5 billion. In January, Apple forecast revenue between $50.0 billion and $53.0 billion for the quarter. The company fell slightly short of the FactSet consensus estimate last quarter, but beat expectations in the five straight quarters before that.

Stock reaction: Shares of Apple have increased 5% from three months ago, underperforming the Dow Jones Industrial Average, which is up nearly 12%. The stock is down 17.5% from 12 months ago, while the index has stayed relatively flat. It recently entered and exited a bear market. Earlier this week, Deutsche Bank analyst Sherri Scribner forecast that Apple shares would “trade at a discount,” as her analysts found that S&P 500 companies with more than a 3% index weight tend to trade at a roughly 20% discount to the market’s forward P/E multiple.

What to watch for: According to MarketWatch, China has been a bright spot for Apple for several quarters (recall the infamous Tim Cook email to Jim Cramer on August 24, 2015), but the world’s largest consumer market is starting to become saturated with smartphones, which is slowing the pace of growth there. Adding fuel to the fire are reports that Chinese regulators this week shut down Apple’s online book and movie services in the country as it tightens guidelines on media. Macroeconomic issues continue to weigh on sales growth not only in China, but in other regions across the world.

Since Apple’s first-quarter earnings report in January, analysts have grown more skeptical on whether the company can maintain the pace of growth it experienced during the heyday of the iPhone. Deutsche Bank’s Scriber, who has a neutral rating and $105 12-month price target on the stock, said that long-term fundamentals suggest “top-line growth will be more challenging going forward.” Last month, BTIG analyst Walter Piecyk said there appears to be a “structural change underway in the pace of upgrades,” which could weigh on sales growth long term.

Despite all the criticism, other analysts are more optimistic that Apple will be able to get through the near-term trauma by building out its software and services platforms. Earlier this month, Credit Suisse analyst Kulbinder Garcha said analysts were underestimating and underappreciating the potential growth of services such as Apple Pay, Apple Care, Apple Music and iCloud.

Will the optimists win out? Find out in two hours.

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