Apple Earnings Preview: Can Services, AI Hope Offset iPhone Slide?

Apple  (AAPL) – Get Free Report is likely to post one of its weakest June quarter earnings report in years Thursday, with investors likely to focus on emerging market demand, as well as its nascent push into AI, to offset a pullback in iPhone sales ahead of its traditional September launch.

Analysts expect iPhone sales to fall around 2% from last year to $39.9 billion, lead by declines in North America and partly offset by improving demand in post-Covid China and emerging markets such as India.

Last month, Morgan Stanley analyst Erik Woodring raised his price target on Apple by $30, to $220 per share, noting that Apple’s India business could be worth as much as $40 billion over the next ten years.

Apple’s recent push into India, which includes the opening of its first retail stores in the Android-dominated market last month, resulted in record March quarter revenue, estimated at $6 billion. Markets in Mexico, Indonesia and the Philippines all tallied record high sales figures as Apple’s installed base of devices topped 2 billion worldwide.

iPhone revenues hit $51.33 billion over the three months ending in March, surprising analysts’ estimates, thanks in part to the sale of high-end iPhone Pro models that were jammed-up over the holiday period. 

However, emerging market sales were also a key driver that helped offset what CFO Luca Maestri called “macroeconomic challenges.”

“Recall, management reported that iPhone sales in emerging markets, such as India, doubled during the March quarter, and it saw a significant opportunity for India as its middle class expands,” said D.A. Davidson analyst Tom Forte, who carries a ‘neutral’ rating with a $185 price target on Apple stock. “On the call, we look for additional details on its expansion in India, including its retail and manufacturing presence.”

More broadly, Apple is likely to post a bottom line of $1.19 per share, just a penny shy of last year’s tally, with group revenues down 1.5% to $81.69 billion.

Services revenues may end up being on of Apple’s bright spots, with cloud, music, pay and television revenues likely to rise 6.1% to $20.8 billion. Looking ahead, however, investors will be keen to hear management’s view on the impact of the Hollywood writers’ strike, which is supported by the actors’ union, on its AppleTV content lineup heading into the autumn.

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“We believe with another 100 million+ new iPhone users on the Apple ecosystem added over the past 18 months and improving attach rates on services, coupled by price increases, that Apple’s services business should reaccelerate over the coming quarters back to a double digits trajectory,” said Wedbush analyst Dan Ives, who carries an ‘outperform’ rating with a $220 price target on the stock. “We believe overall the Services business is worth $1.3 trillion to $1.4 trillion for Apple’s sum- of-the parts valuation and remains an underappreciated asset by the Street with many naysayers still not believers in the ‘new Apple valuation’ reset in motion.

Apple’s AI ambitions will also be in focus following reports that the tech giant is developing generative AI tools to challenge Google’s Bard and OpenAI’s ChaptGPT.

Bloomberg reported that Apple have been developing the new large-language model, known internally as ‘Ajax’ but has yet to define a clear strategy for rolling it out to consumers.

Apple, the world’s most-valuable tech company, has fallen behind rivals such as Alphabet-owned Google  (GOOGL) – Get Free Report and Microsoft  (MSFT) – Get Free Report backed OpenAI in the race to develop consumer and business-friendly technologies that harness artificial intelligence.

CEO Tim Cook told investors in May that AI has “huge” potential, but noted that the group will “continue weaving it into our products on a very thoughtful basis’.”

Commentary on expected demand for its new iPhone 15, expected to launch in September, and its impact on both fourth quarter sales and the follow-on holiday period will likely prove crucial for a stock that has already breached the $3 trillion mark, is trading within a few dollars of its all-time peak and its priced at a multiple for forward earnings of 33x, nearly twice the level of the benchmark S&P 500. 

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“The entire Street will be laser focused on Apple’s quarter as when Cook talks everyone else listens given Apple’s unique perch and perspective around consumer demand globally and what this means for the path looking forward,” Ives noted. “We would expect relatively conservative September guidance as this is all about the drumroll to the main event with the anniversary iPhone 15 launch slated for the mid September timeframe.”

Apple shares were marked 0.3% lower in pre-market trading to indicate an opening bell price of $192.00 each, a move that would still leave the stock with a year-to-date gain to around 54%.

Apple breached the $3 trillion mark late last month for only the second time on record, and its shares are up more than 46.7% so far this year, as megacap tech stocks continue to tighten their grip on U.S. stock performance.

Apple reached the $2 trillion threshold in August 2020, thanks in part to a surge in iPhones and Mac sales linked to the global pandemic. That was nearly two years to the day after it became the first U.S. company to breach the $1 trillion mark.

Its shares were last valued at just over $3 trillion in early January 2022, when the stock traded at $182.86, but more Apple shares were outstanding to boost its overall value.

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