Apple Inc. Stock and Earnings Are All About the iPhone

AAPL stock - Apple Inc. Stock and Earnings Are All About the iPhone

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Suddenly, the fiscal first quarter report from Apple Inc. (NASDAQ:AAPL) on Thursday afternoon looks like one of the most important in years. AAPL stock was cruising along with the rest of the market, seemingly on its way to a trillion-dollar market cap. But since hitting an all-time high on January 18th, Apple stock has given back nearly 6% of its value.

The culprit has been increasingly negative sentiment from the Street about iPhone X sales. A report on Monday suggested iPhone X production targets have been halved. That comes on the heels of multiple negative comments from Wall Street, as Luke Lango pointed out on this site last week.

That puts a lot of pressure on Thursday’s report – because, as I’ve pointed out for some time, the iPhone is the key driver for AAPL stock. Apple’s sales excluding the iPhone were almost bizarrely flat for some five years through fiscal 2016, ranging from $77.8 billion to $80.8 billion over that period and growing just 1.4% – total.

Apple did make some progress in fiscal 2017, with non-iPhone revenue rising 11%. Still, the iPhone accounted for nearly 62% of total sales – and likely a higher proportion of overall profit. And the long-running bear case for Apple stock is that, at some point, ‘commoditization’ will hit iPhone sales.

Cheaper models from Chinese manufacturers will be ‘good enough’. iPhone revenue will decline, and it’s likely Apple earnings will follow.

That’s the fear hitting AAPL stock at the moment. And that’s the fear that needs to be assuaged in the Q1 report.

Is Commoditization Going to Hit AAPL Stock?

It’s important to remember that Apple has faced these worries before. As recently as the summer of 2016, APPL stock traded below $100, and at a low double-digit multiple to its earnings per share. Even though, in theory, the market should price in the company’s launch calendar, AAPL stock does seem to weaken while investors wait for the next product.

Certainly, there’s a case that this weakness, too, shall pass. Investors who bought in during the first half of 2016 have been rewarded with 70%+ gains, as Apple has (mostly) kept pace with mega-cap tech stocks like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL).

A recent rumor suggests that three new iPhones will be coming this fall, and another report suggests the X will be discontinued to as not to cast a shadow over those launches.

But this time may be different. If the iPhone X simply can’t support the $999 (or higher, for larger-storage models) price tags, then pricing can no longer help Apple revenue and margins.

The sheer amount of ‘buzz’ surrounding the X shows a possible limit to consumers’ interest in upgrading. And underneath strong FY16 and FY17 results is a significant concern: revenue from Greater China has declined 24% over the past two years.

In other words, the bear case for AAPL stock may see some support on Thursday. If the iPhone X disappoints, maybe the days of consumers paying any price for the iPhone are over. Continued weakness in China suggests that lower-cost manufacturers may be making some inroads already in that key market.

Meanwhile, better-made and longer-lasting phones limit the need for upgrades and replacement in largely saturated Western markets.

That combination suggests further weakness in iPhone sales going forward – and possibly a big Q1 miss.

Apple Earnings

Even considering some negative notes of late, Wall Street remains rather bullish on Apple’s FY18 results. Consensus estimates suggest a 19% increase in revenue for the full year, with a 10.7% rise in Q1. Where sentiment coming out of Thursday’s report will hinge is on Q2 guidance.

Analysts are projecting a whopping 27% rise in revenue for the quarter, thanks in large part to what was supposed to be ramping iPhone X sales.

If Apple disappoints on that front, it’s hard to see AAPL stock doing anything but falling – and possibly sharply so. The company will have more detail about its tax windfall, and its plans for using cash repatriated from overseas.

CEO Tim Cook likely will be asked about the possibility of a big acquisition – companies like Netflix, Inc. (NASDAQ:NFLX), Walt Disney Co (NYSE:DIS) and even Tesla Inc (NASDAQ:TSLA) have been floated as potential targets.

That’s not enough, though, if iPhone sales disappoint. HomePod isn’t enough, either: even assuming that product does $5 billion in revenue this year, it would add barely two points to Apple’s full-year growth rate. The same is true for even the growing Services business, which accounted for just 13% of fiscal 2017 revenue.

A Big Quarter for Apple Stock

Rather, Q1 is going to be all about the iPhone. Truthfully, I’m loath to bet either way. Betting against AAPL has been a fool’s errand for some time and expectations may be coming down amid the negative noise.

But I do some the potential for a very negative story to come out of the quarter, with coverage potentially centering around a potential iPhone peak. If that’s the lesson investors take away from the quarter, it will be exceedingly bearish for AAPL stock.

What seems likely to happen is that Apple stock will move in further in whatever direction it initially takes following the report. If numbers are better than expected, and iPhone X demand remains solid, AAPL in this market easily could return to the all-time highs around $180.

If they disappoint, both technical and fundamental analysis suggest a drop toward $155, or beyond.

All told, it’s going to be a big quarter for Apple stock. Forced to choose, I’d bet AAPL continues to slip after earnings. For now, I’m on the sidelines, but more nimble traders might see an opportunity here. Q1 results and Q2 guidance likely are going to establish the ‘story’ surrounding AAPL for the next few months, at least.

And I’d bet that story will push Apple stock for several sessions after Thursday afternoon’s release. In which direction the stock goes remains to be seen.

As of this writing, Vince Martin has no positions in any securities mentioned.

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