Apple's share price is up a massive 104% over the past 12 months. Diversification into wearable technology and a new streaming service seem to have kept investors interested. But will Apple [AAPL] continue to beat analyst expectations when it reports Q1 earnings results?
When is Apple reporting Q1 earnings?
How has Apple's share price performed recently?
After two-quarters of year-on-year decline, Apple's revenue grew in Q3 and Q4. In Q4, earnings per share came in at $3.03, against revenue of $64.04 billion - both numbers topping analyst expectations.
Driving this is Apple's decision to broaden its product line up as iPhone sales slow. In last quarter's earnings results, 52.1% of net sales came from iPhone, a 9.2% year-on-year decline. The iPhone is Apple's biggest revenue contributor, so any slowdown is a worry.
Why investors should care about Apple's Q1 earnings?
Wearable sales boost profit
iPhone sales used to dominate Apple's earnings releases. But, with sales slowing, it has cannily diversified into wearable technology and subscription services. Morgan Stanley points out that services and wearables now constitute 27% and 37% of profits respectively.
With Apple's AirPod headphones being a hot seller, and the release of a premium noise-cancelling version - a snip at £249 - investors will be hoping wearables continue to add to the bottom line.
iPhone demand could hit Apple’s share price
Longer battery life and not much difference between models mean that customers have less reason to upgrade. In fact, they’ve been holding off upgrading. Yet Apple has ordered between 75 million and 85 million iPhone 12 models for H2 2020. That's up 10% from the number of iPhone 11s ordered for the same period last year. Any decline in demand could see Apple become unstuck.
Solid balance sheet
Apple's 27.06x price to earnings multiple and low double-digit growth makes the stock look expensive. But, for value-seeking investors, it is one of the few tech stocks that offers a reliable dividend. And if Apple continues to increase cash flows then the current share price could be a steal.
At least, that's the position put forward by Nicholas Ward on Seeking Alpha:
"Simply put, there are few companies in the world with better balance sheets than Apple's, and I'm not sure if there is anyone generating more cash. This cash leads to a lot of flexibility in an ever-changing technological environment, which allows me to sleep well at night holding onto my AAPL shares, even though my position is extremely overweight."
“Simply put, there are few companies in the world with better balance sheets than Apple's, and I'm not sure if there is anyone generating more cash. This cash leads to a lot of flexibility in an ever-changing technological environment, which allows me to sleep well at night holding onto my AAPL shares, even though my position is extremely overweight” - Nicholas Ward
What to expect in Apple's Q1 earnings?
For the quarter, Wall Street is predicting Apple's earnings to come in at $4.54 per share, up 8.61% from the same quarter last year.
Apple is forecasting revenue of $85.5 billion to $89.5 billion; this is in line with the $88.39 billion Wall Street is predicting. And this prediction would top the $84.31 billion seen in this quarter last year, continuing Apple's growth streak.
The quarter will also be the first to take in numbers from Apple TV+. The streaming service launched to stiff competition, going up against Netflix and Disney Plus. Whether it pays off will interest shareholders.
In Zacks Consensus Estimate Apple has beat expectations for the past four quarters - delivering a 3.6% average surprise.
|PE ratio (TTM)||26.77|
|Operating Margin (TTM)||24.57%|
Apple share price vitals, Yahoo Finance, 27 January 2020
What's the long-term outlook for Apple's share price?
The next big battleground for Apple is 5G. Two weeks ago, Morgan Stanley upped their price target to $368 from $296. They cited both strong iPhone sales and the upcoming 5G product cycle as reasons to back Apple.
In the same week, analysts at Nomura raised their price target from $225 to $280. While they also cited the demand for iPhone 11s and wearables, they remained skeptical over 5G. In a note to investors, Nomura said: “We expect the $40-80 incremental BoM (bill of materials) cost to a 5G phone to be a barrier to adoption.”