It wouldn’t be an understatement to suggest Tuesday, July 31, could be the most important day of the second quarter’s earnings season. That’s when consumer-tech giant Apple (NASDAQ:AAPL) will dish out its fiscal Q3 results to millions and millions of AAPL stock owners, most of whom are expecting another round of respectable growth.
Shares have moved deeper into record high territory this month… again.
There will come a time when the iPhone maker runs into saturation headwinds, made even tougher by perpetually-improving competition. There’s no decisive evidence that time is here just yet, though, and even if it is, Apple’s got a plan B.
Either way, there are three things the market will be watching more than any other after Tuesday’s closing bell rings.
Apple Earnings Preview
For the quarter ending in June, analysts collectively expect Apple to report a per-share profit of $2.18 on sales of $52.34 billion. For the same quarter a year earlier, the company generated $45.41 billion worth of business, and turned it into earnings of $1.67 per share of AAPL stock.
Apple has topped estimates for six straight quarters now, and has only fallen short of analysts’ income projections twice in the past three and a half years.
Oh yeah… revenue and income have also been reliably growing for well over a decade now, not necessarily in a perfectly straight line, but far more consistently than most other players in the consumer technology arena. Doubting the company will continue doing so clearly an “against the grain” idea.
Whatever is in the cards, three themes are apt to push AAPL stock around following Tuesday’s report.
3 Things to Watch
1. iPhone
It goes without saying that the company’s flagship product, the iPhone, is going to be the big focal point on Tuesday, especially after last quarter’s sales of the device.
As a refresher, Apple sold 52.2 million iPhones in Q2, in line with expectations of between 52 million and 53 million, and up from the year-earlier total of 50.7 million. It was uncharacteristically slow progress from a company that’s been able to grow its smartphone business at will, however. Odd timing gets at least part of the blame. The company released the iPhone X in November of last year, after releasing the iPhone 8 in September. One may have cannibalized the other.
Either way, iPhone unit sales are slowing. That’s not up for debate. Should they slow again for the company’s fiscal third quarter, owners of AAPL stock could panic.
As of the latest look, analysts are modeling Q3 iPhone sales of around 40 million units.
2. Services
Apple’s proverbial plan B is a ramp-up of its existing services arm.
Apps and digital content (along with some business-oriented tools) were always part of the mix, but never viewed as a profit center in and of themselves until relatively recently. Turning up the heat on this opportunity has proven productive. A quarter ago, Apple grew its Services revenue by 31% year-over-year, to $9.2 billion. That’s still only about one-fourth of the $38.0 billion in revenue the iPhone drove, but it’s tremendous progress all the same.
Morgan Stanley analyst Katy Huberty anticipates Services revenue growing by 32% for the recently-ended quarter.
3. Buybacks
Finally, while trade war chatter has reached a fevered pitch, the fact of the matter is, so far there’s been more bark than bite. Though few care to acknowledge it, it’s likely that the threat of U.S. tariffs on goods imported from China (which looks like they would now include the iPhone) is more likely to result in the negotiation of more equitable tariffs for all… as was the case with Europe’s recent removal of certain tariffs.
Mostly though, nobody can see this future, so handicapping it is dangerous.
Far more important, and tangible, will be the impact of the stock buyback program Apple put in place a long while ago, but expanded to the tune of $100 billion in May. It bought back $32.85 billion worth of AAPL stock during its second fiscal quarter — its biggest purchase yet — but likely continued doing so in a big way during the recently ended third quarter.
Every share it repurchases improves the profitability of stock still issued and outstanding.
Bottom Line for AAPL Stock
Given the mixed bag of Apple’s second fiscal quarter numbers against a backdrop of earnings season shockers from the technology sector — like slowing growth from Facebook (NASDAQ:FB), but a swing to profitability from Advanced Micro Devices (NASDAQ:AMD) — it’s anybody’s guess as to what’s in store Tuesday.
Equally uncertain is how AAPL stock will behave in the aftermath.
Shares have continued to walk, though not run, to record highs through this past week, suggesting investors don’t see any trouble on the horizon. The stock’s taken a couple of sizeable hits over the cloud of the past several months, making it clear it’s not entirely bulletproof. On the flip side, none of those dips stuck; AAPL stock always recovered.
In other words, feel free to hope for the best, but plan for anything. No company stays on a hot streak forever, but as long as investors continue choosing to see this glass as half-full, AAPL stock will continue to find a tailwind.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
