Apple (NASDAQ:AAPL) will be reporting its third-quarter earnings on July 30. Apple stock has performed well since the start of June, posting an 18% gain since June 3, but on July 30 all bets are off.
Bulls — and that includes the majority of Wall Street analysts — feel that even with recent gains, AAPL stock is under-priced. The company’s guidance points to the potential for good news, at least compared to Q1 and Q2.
However, AAPL is creeping close to its 2019 high of $211.75 and there’s a possibility they might deliver underwhelming results on July 30, sending the Apple stock price tumbling.
Two Quarters, Two Revenue Declines, Positive Market Reaction
At the start of 2019, Apple investors entered into territory they hadn’t experienced since 2001. In Q1, the company reported a year-over-year revenue decline of 5%, then repeated that performance in Q2. In both cases, the root cause of the overall decline was slumping iPhone revenue, down 15% in Q1 and 17% in Q2.
Apple’s Q1 earnings report came with plenty of drama to kick off the year. On January 2, Apple issued a guidance note, warning of “lower than anticipated iPhone revenue.” That resulted in AAPL stock getting walloped. It lost 10% of its value the next day.
However, after the company actually reported those Q1 earnings on January 29, Apple stock popped. When Apple reported its Q2 earnings, demand surged for AAPL stock and it closed up nearly 6% the following day. Why the positive market reaction?
The underlying reasons for the two positive outcomes to losing quarters are different. In Q1, the guidance letter had investors prepared for the worst, with many selling off their Apple stock in a panic. The actual reported decline numbers probably came as a relief compared to the outcome some had been picturing. In Q2, the company outperformed (lowered) earnings expectations and issued better than anticipated guidance for Q3 — revenue of between $52.5 billion and $54.5 billion.
What Will Happen to AAPL Stock When Q3 Earnings Are Reported?
If Apple hits revenue near the middle or upper end of its guidance range, it will beat the $53.3 billion it earned in Q3 2018. Doing so would break its two-quarter “losing” streak. There’s a very good chance that the market reaction to that symbolic victory would be positive and result in another bump for the Apple stock price.
That being said, there are risks that could result in AAPL delivering lower than expected earnings. In particular, the trade war between the U.S and China may have cooled during the quarter, but the lingering effects still could have resulted in further erosion of Apple sales in China. Even in Q2, the $10.2 billion in sales from the Chinese market represented nearly 18% of AAPL’s overall revenue. Any significant change there is going to have a big impact on the bottom line.
If the company comes in at the low end of its guidance, that would mark three straight quarters of declining revenue, and this time investors might not be as forgiving.
At the end of the day, despite two straight quarters of revenue decline — something unheard of in the iPhone-era of Apple — AAPL stock has still performed very strongly in 2019, with growth of over 43%. That’s better than many other tech giants. For example, Amazon (NASDAQ:AMZN) has posted near 34% growth for 2019.
The majority of analysts still have Apple stock as a buy, with a 12-month price target of $218.50, meaning there is still time to get in on the action. With Apple’s Q3 earnings report coming in just weeks, now might be the time to buy those Apple shares.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
