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Earnings

Is Apple’s share price set for a disappointing dip after Q2 earnings?

The coronavirus pandemic has slowed down iPhone sales and production. Will Apple’s [AAPL] share price be able to give investors hope for a better future when it reports earnings results?

Technology giant Apple may be one of the world’s most recognisable brands, but even it has struggled to demonstrate resilience as the COVID-19 pandemic continues. Apple’s share price is currently 11.5% below the level it was trading at in the middle of February, sitting at $287.73 by 28 April’s close.

Back in February, the company warned that weakened demand and factory output in China had affected its supply chain dramatically. The situation has been compounded by physical store closures and reduced disposable income levels globally, a combination of which could see iPhone sales drop by 36% in the third quarter of the calendar year, according to Goldman Sachs. Worrying developments for Apple’s share price investors.

 

 

 

In a note to clients, Goldman Sachs’ Rod Hall advised that shares be sold because of an expected decline in device sales. Hall downgraded Apple’s share price to sell from neutral and also lowered his share price target from $250 to $233. Goldman Sachs foresees a situation where Apple’s profitability declines 19% over the calendar year. 

So with Apple’s latest earnings release imminent, how can we expect the company to have performed? And how is Apple’s share price likely to react post-earnings?

 

The difficult second quarter

Apple will be reporting off the back of an exceptional first fiscal quarter. It posted $91.8bn total revenue and $55.96bn in iPhone revenue, compared to consensus estimates of $88.5bn and $51.62bn. Meanwhile, earnings per share of $4.99 surpassed the estimated $4.54. “It was a blockbuster quarter all the way around,” CEO Tim Cook told CNBC.

As for the current quarter, Apple itself has admitted that it’s not going to meet the guidance it had announced during the earnings call in January. At the time, Cook said Apple had set a total revenue target of between $63bn and $67bn, wider than usual due to the then uncertainties around the pandemic. However, given how the situation has unfolded, even hitting the lower end of that target now seems unrealistic.

$63-67billion

Apple's total revenue target set before the pandemic

 

In a statement, the company warned that “worldwide iPhone supply will be temporarily constrained”. While its manufacturing partners in China were reopening their sites gradually, Apple reported that they are “ramping up more slowly than we had expected … iPhone supply shortages will temporarily affect revenues worldwide.” iPhones sales account for just over half of Apple’s total revenue.

According to Yahoo Finance, analysts predict the company’s total revenue for the quarter will now be between $45.58bn and $60.72bn. The average of 25 analysts’ estimates is $54.6bn.

 

Market Cap$1.259trn
PE ratio (TTM)22.84
EPS (TTM)12.60
Quarterly Revenue Growth (YoY)8.90%

Apple share price vitals, Yahoo Finance, 30 April 2020

 

Getting Apple back on track

The slightly good news is that any constraints on the supply chain will be short-term. Goldman Sachs’ Hall doesn’t envisage that consumers looking to upgrade will turn to other smartphone makers during the downturn, but rather remain loyal and wait for future product announcements. The next iPhone release is set to be pushed back, but will still take place before the year is out — it’s also expected to support 5G, which will help accelerate sales of handsets because of the improved download speeds it offers. 

This is likely to come with a caveat. Instinet’s lead equity analyst Jeffrey Kvaal says that the 5G-supported iPhone is running around four to six weeks behind schedule and orders of handsets currently available are being pushed back as well, according to Barrons. As a result of the delay, Instinet expects the company to shift 63 million handsets of the more expensive iPhone 12 handsets before the calendar year is out, fewer than the 70 million it had originally forecast. 

63million

Apple's expected number of iPhone 12 sales in 2020

 

In March, Morgan Stanley lowered its estimate for fiscal 2020 revenue by 4.5%, but raised its estimate for fiscal 2021 revenue by 3%. Morgan Stanley analyst Katy Huberty had said that loyal customers will reaccelerate handset growth once stores around the world do reopen, according to the Street

Huberty affirmed an overweight rating for the stock but lowered the share price target to $328 a share from $368. 

Despite the ongoing uncertainty around COVID-19, Apple’s long-term prospects beyond the current quarter and future product announcements, including in the wearables segment, are an indication of why many analysts have not been quick to recommend the stock be sold. 

According to MarketBeat, 29 of 43 analysts have assigned Apple’s share price a buy rating, while 10 have given it a hold rating and four have rated it as a sell. 

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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