Low Apple expectations could see an earnings surprise
The recent sell-off in technology shares appears to have passed Apple by despite the fact that the market appears to have fallen out of love with one of the biggest cash generators on the S&P500.
Recent share price performance has been lacklustre at best, despite some pretty compelling fundamentals when compared to the rest of the sector.
This could well change if investors start to look more at the underlying fundamentals and focus less on the headline noise driven by some of the more daft valuations that seem to be prevalent in the technology sector at the moment.
Apple trades on a forward P/E of 12.5 which compares very favourably to some of the technology stocks that investors seem to have a penchant for at the moment. It also generates an awful lot of cash and investors will no doubt be looking at what the company intends to do with that cash given recent buybacks, as well as any clues as to what it has in store over the course of the next few months with respect to potential new products like the iPhone 6.
Facebook for example has a forward P/E of 50, while Google who disappointed the markets last week has a forward P/E on its “A” shares of 20.3.
When Apple updated the market in Q1 investors took fright when expectations of Q2 were downgraded which saw the stock drop 8% when it opened the following day. That last trading update saw a record number of iPhones sold at 51m while the number of iPads sold came in at 26m, which suggests a bit of an over-reaction.
The share price drop occurred because the company downgraded its forecast for revenues from $46bn to $44bn which is still pretty good, and tonight we will see whether or not this caution was justified, even if the share price drop seemed excessive at the time, and still seems so even now.
Investors were disappointed at the downgrade to Q2, given the company had only recently signed an agreement with China Mobile to sell iPhones in China, which had raised expectations that the company would be more bullish about revenue growth in the second quarter and the remainder of the year.
It would seem that Apple was right to be cautious if this week’s results from China Mobile are any indication, given that the Chinese economy appears to be struggling at the moment, and lowballing revenue estimates appears to be a popular past time for companies worried about revenue and profits slowdowns.
Since Apple signed that agreement shares in China Mobile have lost about 10% of their value as quarterly revenues have declined on the back of rising subsidies to shift Apple’s devices across their network.
The key things to watch out for are any signs of a slowdown in iPhone and iPad sales, with expectations of around 38m iPhone units sold, and whether the new lower spec models have started to eat into the revenues from the higher spec models.
An announcement about the new iPhone 6 could well also help assuage market concern about a lacklustre product pipeline.
Whatever happens revenues are likely to be much lower than Q1 simply because Q1 took in the Christmas trading period which always tends to outperform.
The key takeaway is likely to be how the company assesses its performance over the remainder of the year, with any disappointment likely to see the share price test a key support level near the $510 level, as well as this year’s low point which occurred after the previous downgrade to the company’s outlook.
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