The Apple Inc. (NASDAQ:AAPL) earnings report on Thursday afternoon is a big one, for a number of reasons. Most obviously, the AAPL share price is just off an all-time high after a sizzling 44% gain year-to-date. Obviously, Apple stockholders would like to see an earnings beat that keeps that run going.
From a broader standpoint, the report looks key as well. Apple is going to detail iPhone X sales and orders, which in turn will have an impact on fiscal 2018 estimates from the Street. Full-year results in the Services segment, a key driver in Apple’s efforts to diversify away from the iPhone, will show whether CEO Tim Cook’s goal of doubling those sales by fiscal 2020 remains intact. And investors should receive some color, if not outright answers to a number of key strategic questions as well.
In all, there are a number of key questions investors will be looking to answer. Starting with…
How are iPhone X Sales — And Supplies?
There has been some good news and bad news related to the iPhone X launch. The good news — which investors of late have seen as more than good enough — is that orders look strong, with the pre-order stock sold out within hours. The bad news is that it remains unclear when those ordered phones actually will ship.
Reports of supply delays have swirled for months, with an analyst saying last month that few would be available before the beginning of 2018. Lack of supply over the holidays could open the door for the Pixel 2 from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), though that product has had a bumpy launch of its own.
At this point, I would think the market will take any news regarding the iPhone X mostly in stride. Investors expect some type of delay. At least from recent trading, they don’t expect that delay will impact long-term demand. Unless those issues are much, much greater than believed — or Apple’s supply chain somehow delivers a positive surprise — I expect iPhone X supply issues will be of more interest to consumers than investors.
What’s Going On In China?
An under-covered concern for the AAPL stock price is its performance in China. Back in June, InvestorPlace columnist Tom Taulli asked if the company was becoming the BlackBerry Ltd (NYSE:BB) of China. Through the first three quarters, revenues in that key market are down 12%.
With the U.S. largely saturated from a hardware perspective, China is a key growth market for Apple. And yet the company continues to lose market share to in-country manufacturers like Huawei.
That needs to change if they want the multiple underlying the AAPL stock price to continue to increase. Without growth in China, there’s a risk of iPhone sales peaking as upgrade cycles extend and “commoditization” eventually reaches the smartphone space.
Apple needs better results in China, and Asia more broadly. Good Q4 numbers and/or optimism toward the iPhone X launch in that country would be a good step in that direction.
How’s The Services Business Doing for Apple?
Between fiscal 2012 and fiscal 2016, Apple’s non-iPhone revenues were almost bizarrely flat, as I pointed out earlier this year. From a long-term standpoint, the company remains significantly reliant on the iPhone for sales and particularly profits, a reliance that has some danger given the long-term risks surrounding hardware more generally.
CEO Tim Cook has set a target of doubling revenue from services like iTunes, Apple Pay and the App Store by fiscal year 2020, in part to minimize that reliance. With revenue up 19% YTD, Apple clearly is heading in that direction — although not quite fast enough.
Apple probably needs to make an acquisition in that space to hit the 2020 target, and so both the numbers and the commentary surrounding the business will be closely watched.
Strength there could mitigate some of the hardware concerns facing AAPL stock. Weakness might again raise the question of what happens to Apple when iPhone sales inevitably start to moderate.
What’s Up With Qualcomm?
Finally, investors elsewhere will be following Apple’s earnings calls closely as well.
The Wall Street Journal reported that Apple may drop chips from Qualcomm, Inc. (NASDAQ:QCOM) amid their nasty legal dispute. Cook has spoken to the broader dispute with Qualcomm in the past, and may address that report on the Q4 call. Should Apple move on, QCOM stock would be a loser — and Intel Corporation (NASDAQ:INTC) a likely winner.
Playing AAPL Stock Into Earnings
Overall, it’s going to be a key report for Apple, and one that likely determines the direction of AAPL stock for the near future.
Strong performance from the iPhone X and Services keeps the run going, with a forward P/E multiple of just 15x providing room for more multiple expansion.
But a stumble brings back the market’s seemingly on-again, off-again growth concerns surrounding AAPL stock. I still think those concerns are valid long-term, but so far most investors have disagreed. We shall see if Apple’s Q4 is enough to keep me on the wrong side for at least another quarter.
As of this writing, Vince Martin has no positions in any securities mentioned.