27 Jul

Could Apple’s Q3 Results Justify Its Gains This Year?

WRITTEN BY Sharon Bailey

Tech giant Apple (AAPL) is set to announce its fiscal 2019 third-quarter (ended June 30) results on July 30. Investors will be watching to see if the company’s iPhone sales return to growth after declining 15.8% in fiscal 2019’s first half.

Apple has made news for other reasons as well. The company announced an agreement with Intel (INTC) to acquire most of Intel’s smartphone modem business for $1 billion. Apple was also in the news after Donald Trump tweeted that the company will not receive tariff waivers on product parts made in China.

Could Apple’s Q3 Results Justify Its Gains This Year?

Recap of previous results

Apple reported better-than-expected revenue and earnings in fiscal 2019’s second quarter. Its revenue fell 5.1% YoY (year-over-year) to $58.0 billion but surpassed analysts’ expectation of $57.4 billion.

Its top line fell due to persistently weak iPhone sales, the company’s largest revenue source. In the second quarter, iPhone sales dropped 17.3% to $31.1 billion. In a letter issued in January, Apple CEO Tim Cook disappointed investors by lowering the company’s first-quarter revenue guidance due to weak iPhone sales, for which he cited weakness in Greater China and other emerging markets. He also blamed the weak numbers on internal factors such as the timing of new iPhone launches.

In the second quarter, the lower iPhone sales were partially offset by growth in the company’s other revenue categories. Revenue from Apple’s Services, iPad, Wearables, and Home and Accessories categories grew about 16%, 22%, and 30%, respectively. Apple’s adjusted EPS fell 9.5% to $2.46 in the second quarter but beat analysts’ forecast of $2.36.

Trade tensions paint a gloomy picture for Apple

The US-China trade war has kept tech companies worried over the last few months. In June, Apple addressed a letter to the US Trade Representative outlining its concerns about how the US-China trade conflict could harm its global competitiveness. The company indicated that the proposed tariffs could impact sales of iPhones, iPads, Macs, and accessories.

The situation doesn’t seem to have improved recently, with Trump tweeting on Friday that his administration would not grant tariff relief to Mac Pro parts manufactured in China. The new Mac Pro is slated to release this fall.

Apple’s Q3 estimates

In the third quarter, analysts expect Apple’s revenue to rise by 0.2% to $53.4 billion, driven by Services and Wearables. Apple’s service subscriptions are growing robustly. They grew by 30 million in the second quarter alone, with Apple ending the period with 390 million paid subscriptions.

However, Apple’s iPhone sales, which accounted for 58.3% of its overall revenue in fiscal 2019’s first half, could significantly impact the company’s third-quarter revenue. Apple expects third-quarter revenue of $52.5 billion–$54.5 billion, compared with $53.3 billion in the third quarter of fiscal 2018. The company’s guidance accounts for 300 basis points of expected currency headwinds.

Analysts expect Apple’s adjusted EPS to fall about 10.3% to $2.10 in the third quarter. Among FAANG stocks, Amazon reported lower-than-expected EPS for its second quarter on Thursday. On the other hand, Google announced strong second-quarter results after markets closed.

Stock movement ahead of earnings

As of Thursday, Apple stock had risen 31.2% this year. The tech giant was ahead of the S&P 500 and Dow Jones, which had risen 19.8% and 16.3%, respectively.

Deutsche Bank initiated coverage of Apple stock with a “hold” rating in June. And this month, Rosenblatt Securities downgraded Apple stock to “sell” from “hold.”

As of Thursday, 23 of the 43 analysts tracking Apple stock recommended “buy.” Seventeen recommended “hold” and three recommended “sell.” Their average 12-month price target of $213.53 for the stock reflects an approximate 3% upside from its July 25 price.

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