Why Apple’s Q4 Earnings Will Be Unique

With just one week until its fiscal 2019 fourth-quarter earnings results, Apple (AAPL) is trading at a new high. Investor optimism, encouraging iPhone sales, and a slew of analyst upgrades are a few catalysts for this bull run. Since the beginning of October, Apple stock has soared 8.5% to close at $243.58 on October 24. Considering the buoyant market sentiment, it wouldn’t be surprising if the stock crossed $250 after its results on October 30.

Apple’s annual event on September 10 breathed new life into its stock. The event introduced the iPhone 11, and the smartphone’s runaway success raised Apple to a whole new level. Since the event, the stock has gained more than 12%. Those who had written off Apple’s iPhone business have fresh food for thought now. This has set the tone for Apple’s upcoming fourth-quarter earnings release.

Along with the iPhone 11, some other factors have made this quarter unique for Apple.

Early sales of Apple’s iPhone 11

Apple’s new iPhones hit the shelves on September 20, just ten days ahead of the end of its fourth quarter. Still, investors are eager to know the impact the release has had on its fourth-quarter revenue even in this small window. On September 16, Apple analyst Ming-Chi Kuo predicted that the demand for the new iPhones would be better than expected in the preorders.

On October 24, CIRP (Consumer Intelligence Research Partners) revealed new data indicating that nearly 20% of US iPhone buyers bought one of the three iPhone 11 models in the fourth quarter of fiscal 2019. Meanwhile, the iPhone XR made up 36% of iPhone sales in the US during the quarter.

Upbeat China sales

On October 24, UBS analyst Timothy Arcuri was highly bullish about Apple’s performance in China. He stated that Apple had demonstrated better seasonal strength this fourth quarter than in the fourth quarter of fiscal 2018. Arcuri said, “More importantly, there has been growth in two of the last three months following declines for two and a half years.” It’s quite likely that it’s the affordable iPhone 11 that’s driving Apple’s success in the Chinese markets. As Apple had been catering only to the premium segment there, iPhone shipments were on the decline.

However, its fourth-quarter results might see better demand from China. Wedbush analyst Daniel Ives wrote in a research note, “We believe China demand is tracking roughly 15%-20% above expectations on iPhone 11 thus far and will continue to be a major driver of strength over the coming quarters.”

Greater China accounts for nearly 20% of Apple’s total revenue, and the iPhone plays a significant role there. As per Canalys estimates, Apple sold 6.5 million iPhones in China in the second quarter of 2019. This number was down from 5.7 million in the first quarter. Will the September quarter see a rebound? Analysts seem to think so.

Better App Store revenue

In early September, a note from Morgan Stanley indicated that Apple’s App Store’s revenue growth for the fourth quarter could surpass expectations. Morgan Stanley’s forecast is based on new research from Sensor Tower, an app-data-tracking company. The company indicated that August App Store revenue posted its strongest YoY (year-over-year) growth since February 2018. It also saw the highest month-over-month rise since early 2015. Morgan Stanley’s Katy Huberty further expects App Store revenue growth of more than 18% for the fourth-quarter fiscal 2019. She added that the App Store is on track to achieve this level of growth.

A more recent update from Sensor Tower revealed that in the September quarter, Apple’s App Store posted estimated gross app revenue of $14.2 billion. The gross app revenue from the App Store in the same period in 2018 was $11.6 billion.

The App Store contributes more than 20% to Apple’s Services segment, and the company is now focused on expanding its Services base. If the App Store’s revenue is better than expected, it means that we can expect upbeat results from the Services segment too.

Apple Pay to be a new revenue contributor

eMarketer said that in 2019, nearly 30.3 million users in the US are likely to use Apple Pay. The number exceeds Starbucks’s (SBUX) expected user base of 25.2 million. On Apple’s fiscal 2019 third-quarter earnings call, CEO Tim Cook revealed that Apple Pay had handled more than 1 billion transactions per month. He touted that the service was growing faster than PayPal. eMarketer also reported that Apple Pay was more popular than Starbucks and Google (GOOG).

Investors expect a rebound

Even though the first quarter contributes the most to Apple’s revenue, the fourth quarter is particularly important this time around. After three lukewarm quarters, market watchers have pinned high expectations on Apple. We’re curious to see whether its results validate these expectations. Meanwhile, UBS analyst Timothy Arcuri raised Apple stock’s price target to $275 from $235.