Earnings season in the third calendar quarter is just around the corner. Apple will announce its results on Thursday, October 28, after the final bell. As usual, Apple Maven will follow the event via a live blog, always keeping in mind how Apple sells shares (AAPL) – Download Apple Inc. (AAPL) report will work during and after earnings.
Today, I present a few reasons why the Cupertino-based company and its stocks could surprise analysts this earnings season, and how that could be good news for investors.
(Read more from Apple Maven: Apple shares: 3 reasons why Selloff is an opportunity)
Expect the iPhone to be powerful
For several months in 2020 and before 2020, bulls and bears on Wall Street disagreed about how successful Apple’s 5G “super cycle” would be. Some, like Wedbush’s Ives Day, believed the iPhone 12 would trigger a powerful wave of upgrades that would last for years. Several others were less optimistic.
As I said recently, the financial results of last year’s iPhone exceeded expectations. An example of this, Apple’s smartphone revenue in the quarter after the holidays rose by an incredible 66% year-on-year due in part to accumulated demand, as Apple experienced production delays in the previous period. Growth data underscored the power of the 5G super cycle as early as 2020.
The better news is that this year’s iPhone 13 has shown signs of meeting even higher demand. Analyst Dan Ives estimates that orders for the new iPhone 13 were about 20% higher than orders for its predecessor 2020. Meanwhile, Mathew Cabral of Credit Suisse sees waiting times for the Apple iPhone 13 family that continues to track longer than similar models last year .
Since the iPhone 13 was introduced so recently, I believe many Wall Street analysts will be too slow to undo their expectations in time for earnings season. Add the very risky expectations to the very light companies hit by the pandemic in the fiscal quarter last year, and Apple is likely to impress with iPhone revenue.
(Read more from Apple Maven: Apple Stock: iPhone Super Cycle is alive and well)
Services can be resilient
The other part of the puzzle that I think will be important are the services. This key business segment was responsible for nearly 20% of Apple’s total revenue in fiscal 2020, and an even more impressive third of total operating profit over the same period.
The Apple Services segment enters its fourth-quarter fiscal season, which is outraged by the bearish narrative surrounding the App Store, which I estimate accounts for one-third of Apple’s service sales. Recall, Apple has succumbed to pressure from global regulators and adjusted its compensation policy in favor of certain application developers, at the cost of part of Apple’s commissions.
I think it is likely that analysts and investors will be more cautious about Apple’s services before the earnings season. However, there seems to be enough evidence to suggest that Apple’s financial reports will barely impact the drama in the App Store.
For example, Katy Huberty of Morgan Stanley says any negative impact of recent events in the App Store will be 2% of revenue and 5% of EPS at worst. Kyle McNealy of Jefferies estimates that EPS could have a 4% impact, and the analyst suspects that any impact would be felt before the June 2022 quarter.
Partly due to unaccepted expectations, I believe Apple’s service segment has a good chance of over-delivery in the fiscal fourth quarter of 2021.
The tape is finally set low
And finally, Apple shares are notorious for being priced before big announcements (e.g. earnings day, product launch, etc.) and sold out after these events. This time, however, Apple shares are trading about 9% below their all-time high a month ago, despite a lack of apparent deterioration in the business base.
To be clear, the stock price is not something that Apple can directly control. Also, revenues and expectations of EPS growth, of 31% and 68%, respectively, may seem high for the Cupertino-based company to surpass them (note here that trade-offs will be very easy in 2021).
Still, I believe that AAPL shares can finally benefit after-earnings trading if they come into earnings season in a position of relative weakness this time around. If that turns out to be true, Apple investors could be pleasantly surprised in the next few weeks.
Compared to expectations of 31% and 68% year-on-year revenue growth, respectively, and EPS, how do you think Apple will perform in the fourth fiscal quarter?
Get more expert analysis on AAPL
It is never too early (or too late) to start increasing your investment portfolio. Join the real money community for just $ 7.50 a month and unlock expert advice from our team of 30+ investment experts.
(Disclaimer: This is not investment advice. The author may have one or more shares listed in this report. The article may also contain affiliate links. These partnerships do not affect editorial content. Thanks to Apple Maven for support)
Friendly communicator. Music maven. Explorer. Pop culture trailblazer. Social media practitioner.