Apple Inc. (AAPL): Q2 Earnings Preview

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Being the world’s biggest company, as well as the maker of the world’s most popular smartphone, even Apple Inc. (AAPL) earnings reports are well-watched events. Tuesday’s post-close news from Apple regarding its second fiscal quarter will be no different.

Apple Stock: 3 Things to Know Before Tuesday's Earnings (AAPL)

This upcoming quarterly report — concerning iPhone demand, slowing smartwatch sales and an uncertain future for the iPad — could be a make-or-break moment for Apple stock. It may well force traders to decide if Apple is still a consumer technology champion or just another tech company.

With that as the backdrop, here’s a closer look at what to expect on Tuesday, how those numbers fit into the bigger picture and what’s most apt to push AAPL around before, during and after the earnings call.

Apple Earnings Preview

As of the latest look, analysts collectively expect Apple to report earnings of $2 per share on $51.97 billion worth of revenue for its second quarter. Neither compares favorably to year-ago numbers, when the company posted a per-share profit of $2.33 on $58.01 billion in sales. If sales do indeed drop on a year-over-year basis, it will be the first time in over a decade it’s happened.

The culprit, of course, is the iPhone. Apple sold 61 million iPhones in the second fiscal quarter of last year, but only expects unit sales of 50 million this time around.

And that lull could get worse before it gets better. Maybank analyst Warren Lau believes that for the quarter ending in June, iPhone sales could slump by more than 20% on a year-over-year basis. Apple’s earnings report and conference call will offer some more color on that possibility.

3 Things to Think About

While the numbers ultimately tell the tale, driving the numbers are a variety of subjective forces — some for the better, some for the worst. Three of those themes could make a bigger impact on Apple’s stock value than the rest for the foreseeable future.

Is the Market Saturated?: Apple enthusiasts and stock owners alike are quick to point out that while there are more than one billion iOS-driven devices in use all over the world, the global population now exceeds 7 billion. That leaves 6 billion, give or take, potential customers who could still buy an Apple device. The reality is, however, most of the remaining 6 billion probably aren’t going to buy an iPhone, and iPad or a Mac at any point in the near future. Indeed, sales of the all-important iPhone may be close to topping out. Some will suggest the new lower-priced iPhone SE will open up a whole new market segment for Apple, and they’re (more or less) right. It’s the first time Apple has seen fit to target the value-oriented arena — where competition is fierce — perhaps indicating it’s run out of premium-prime-paying customers. Indeed, the previous quarter’s iPhone sales outlook says we’re about to see the first-ever year-over-year decline in the number of units sold.

The Fate of the iPad: While Apple’s tablets are easily the best in the bunch, it hasn’t been the must-have product many hoped it would be; the high price keeps it out of reach for most consumers. In response to waning tablet sales, Apple revamped its iPad strategy almost two years ago to position the device as a business tool that could replace desktop and laptop computers, even partnering up with once-rival International Business Machines Corp. (IBM) to better target enterprise customers. The strategy has gotten a little traction, but not a great deal of it. It remains to be seen if the iPad will be able to offset the iPhone’s slowing sales. Problem is, nothing else is even close to being able to do so.

Focus on Digital Media: While Apple may have gotten the digital media business model rolling with its iPod device and subsequent iTunes venue, it’s allowed others to lap it on the on-demand video front. For a while it was primarily Netflix, Inc. (NFLX) creating a headwind for Apple’s completely different a la carte style of on-demand streaming video offer, but Amazon.com, Inc. (AMZN) has eased into the a la carte, as well as the monthly subscription-based on-demand video space in the meantime. Meanwhile, Sling TV from DISH Network Corp (DISH) has also largely become a version of the cable television service Apple teased consumers with a year ago but has yet to bring to the market.

If Apple wants to sell more devices (and generate some recurring revenue for a change), it must do better with its digital media sales.

Bottom Line for Apple Stock

While Apple remains the iconic name in the consumer-tech space, it hasn’t been wildly impressive in years.

Investors have mostly overlooked that lack of a “wow” factor, giving Apple CEO Tim Cook some leeway to adjust to the next era of smartphones and digital content.

It’s been long enough, however, and if Apple’s revenue and iPhone sales have both fallen on a year-over-year basis in the company’s second quarter, the risk of the market finally turning on AAPL in a big way isn’t insignificant.

From here, Apple can’t afford to reveal any weaknesses.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/apple-stock-earnings-aapl/.

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