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Key Aspects to Look for in Apple’s Q3 Results Today

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Apple (AAPL) plans to declare its results for the third quarter of fiscal 2019 after the market closes today. Investors will be eager to know Apple’s fourth-quarter guidance and the trend in its iPhone sales, which have been declining in the recent quarters. Also, investors will want to see if the company can sustain the rapid growth in its services business and other growth categories like wearables.

Apple has exceeded analysts’ earnings expectations for 12 quarters. The tech giant has stayed ahead of the revenue expectations for eight consecutive quarters. However, Apple’s revenue declined in the first two quarters of fiscal 2019 due to lower iPhone sales. Notably, the company’s revenue fell 4.5% and 5.1%, respectively, in the first and second quarters.

The company’s adjusted EPS rose 7.5% to $4.18 in the first quarter. However, second-quarter EPS was down about 10% to $2.46.

Analysts expect third-quarter revenue to grow 0.2% to $53.4 billion and adjusted EPS to decline about 10.3% to $2.10. In the third quarter, Apple expects its revenue between $52.5 billion–$54.5 billion. The company’s fiscal 2018’s third-quarter revenue was $53.3 billion.

Apple’s iPhone revenue: is growth expected?

iPhone is the major revenue source for Apple. Notably, the iPhone contributed 58.3% of the company’s overall revenue in fiscal 2019’s first half. Growing competition from local players in key markets like China and slowdown in the smartphone market have been dragging down iPhone sales.

iPhone revenue declined about 15% in the first quarter and the decline rate was over 17% in the second quarter. Overall, iPhone revenue fell 15.8% to $83 billion in the first six months of fiscal 2019.

According to data released by Canalys on July 30, 2019, Apple’s shipments fell 14% in the China market in the second quarter. In contrast, Huawei’s shipments surged 31%, and the company retained its top position in the Chinese smartphone market. Overall, smartphone shipments in China fell 6% in the second quarter, marking the ninth straight quarter of decline.

Based on Apple’s overall revenue guidance, a slight improvement in the rate of decline in iPhone sales is expected in the third quarter.

Growth beyond iPhones

Recently, the strength in Apple’s services business and revenue from its wearables, home, and accessories business has been able to offset the weakness in its iPhone revenue partially.

In the second quarter, Apple’s services revenue grew 16.2% to $11.5 billion and accounted for about 20% of the overall revenue. The company experienced double-digit growth in its revenue from the App Store, Apple Music, cloud services, Apple Pay, AppleCare, and App Store search ad business. The company is further enhancing its services business with the addition of Apple News and Apple TV+ streaming service.

Revenue from the wearables, home, and accessories category surged 30% to $5.1 billion in the second quarter. In particular revenue from wearables, like Apple Watch, rose about 50%. Also, iPad experienced its strongest revenue growth rate in six years. iPad revenue grew 21.6% to $4.9 billion in the second quarter.

How other FAANG companies fared

FAANG stocks Facebook (FB), Amazon (AMZN), and Google (GOOG) reported their results last week.

Facebook’s revenue grew 28% to $16.9 billion in the second quarter. The company generated higher advertising revenue driven by a strong rise in ad impressions. Facebook’s adjusted EPS grew 14.4% to $1.99 per share, beating analysts’ estimate of $1.88.

Amazon’s net sales increased 20% to $63.4 billion in the second quarter. In addition, the company’s EPS rose 3% YoY to $5.22 but missed analysts’ estimate of $5.57. Higher shipping costs weighed on the bottom line.

Google’s revenue grew 19% to $38.9 billion in the second quarter. A 16% rise in advertising revenue and strong growth of about 40% in other revenue (including Google Cloud and Google Play) were the key revenue drivers. The company’s adjusted EPS grew 21% to $14.21 against analysts’ forecast of $11.33.

Apple’s valuation ahead of results

As of July 29, Apple was trading at 12-month forward PE of 17.0x. The company’s forward valuation multiple has risen 3.2% since it announced its second-quarter results in April. Currently, analysts expect Apple’s fiscal 2019 revenue to decline 3.4% to $256.7 billion. Adjusted EPS is expected to drop 4.2% to $11.41.

In addition, analysts expect Apple’s fiscal 2020 revenue to grow 4.2% and adjusted EPS to rise 9.7%.

As of July 29, Apple stock was up 32.9% on a year-to-date basis.

Last week, Apple finally announced its decision to acquire the majority of Intel’s (INTC) smartphone modem business for $1 billion. The deal is anticipated to close in the fourth quarter of 2019. Notably, this acquisition will enable Apple to develop 5G technology in-house for iPhones and other future products. To know more, please read Apple Buys Intel’s 5G to Tap Billion-Dollar Market.

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