Apple (AAPL) 1st Quarter Earnings: What to Expect

Apple earnings ()

Apple earnings ()

Will reports of weak iPhone X sales, and possibly reduced guidance, continue the recent slide in Apple (AAPL) shares which have fallen more than 5% over the past week?

Investors are bracing for these answers when the Cupertino-based tech giant reports first quarter fiscal 2018 earnings results after the closing bell Thursday. The company has erased all of the stock gains made over the past three months. The reason? The iPhone X, launched last fall at a price of $999, was a part of Apple’s super-cycle, which at the time sent Apple shares to all-time highs of $180.

But in recent weeks, analysts have been less than lukewarm about the phone’s demand for the first quarter that ended in December. Complicating matters, there are also reports that Apple has cut its iPhone X production by as much as 50%, which would also imply that the company may lower its guidance for the second quarter that ends in March. As such, Wall Street’s revenue estimates for Q2 has been reduced by as much as 10%.

Is it an overreaction?

All of this is predicated on what Apple reveals Thursday and how it guides.

In the three months that ended December, Wall Street expect the company to report earnings per share of $3.83 on revenue of $87.06 billion. This compares to the year-ago quarter when Apple earned $3.36 per share on $78.35 billion in revenue. For the full year, ending October, earnings are expected to rise 24.6% year over year to $11.48 per share, while full-year revenue of $272.24 billion would rise 18.8% year over year.

The headline numbers alone won’t be what drives Apple stock. Apple’s profit margins for the quarter and how it guides for the second quarter will be headily scrutinized. In terms of margins, the company has eight different iPhone models, ranging from $350 to $999. The company’s product mix and the production cost of each category would determine the strength the quarter in terms of revenue and earnings. This is where the company’s iPhone-for-everybody strategy comes into play.

In other words, while Apple does not give data on specific iPhone models sold, it has the benefit of a much wider lineup, unlike in previous quarters. So, assuming rumors are correct that demand for the iPhone X is weak, Apple can still make up the implied revenue and margin weakness if it were able to sell more of the iPhone 7 or iPhone 8 models.

This means, as with the fourth quarter, when rumors surfaced that Apple had limited supply of the iPhone X, the company guidance suggested the rumors were false. The same thing may happen this quarter. Elsewhere, there will also be plenty of attention placed on Apple’s Services business, which grew 34% to a company record $8.5 billion in the fourth quarter, topping forecasts of $8.02 billion. That segment, which includes Apple Music, the App Store and Apple Pay, is now Apple's second-largest business, while delivering the highest profit margins.

In short, the recent pullback in Apple stock is a buying opportunity for investors who are willing to hold for the next 12 to 18 months. These shares, which also 1.5% yield, should reach $210 to $220 by the end of the year.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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