Apple (AAPL) 2nd Quarter Earnings: What to Expect

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I recently asked whether Apple (AAPL) should re-think its M&A strategy, which, for a long time, has been to only buy smaller complimentary assets that can enhance its existing business.

With an estimated $245 billion in cash on the balance sheet and another $76 billion in operating cash flow, there's not much Apple can't buy. The company, which is set to release second quarter fiscal 2019 earnings results after the closing bell Tuesday, has enough cash that would rank it in the top ten of the most valuable companies in the S&P 500 index. But Apple’s growth is slowing. And buying assets to grow the top line has proven to be a fruitful strategy for decades.

I’m not holding my breath, however. Apple has been successful without my input. But with the stock stalling, down 6% in six moths, investors want growth any way it comes. This is one of many topics that analysts will ask about on Tuesday. The company’s recent patent-licensing agreement with Qualcomm (QCOM) will be another major topic. Apple and Qualcomm, which were in a long-standing patent license dispute, reached a six-year license agreement, effective as of April 1, 2019, including a two-year option to extend, and a multiyear chipset supply agreement.

This means when it comes to the push for 5G both companies realized they need each other. But this agreement came after Apple explored all options, including buying Intel’s (INTC) chip business, according to the Wall Street Journal. This deal would have been to, presumably, develop its wireless chips in-house and walking away from Qualcomm altogether. Analyst will try to unpack all of that on Tuesday, including Apple’s performance in China, which had deteriorated to an extent that prompted the company to cut guidance in January. To that end, should Intel’s weaker-than-expected guidance serve as an ominous sign?

In the three months that ended March, Wall Street expect the Cupertino, Calif.-based tech giant to earn $2.36 per share on revenue of $57.44 billion. This compares to the year-ago quarter when earnings came to $2.73 per share on revenue of $61.14 billion. For the full year, ending September, earnings are expected to decline 4.5% year over year to $11.37 per share, while full-year revenue of $254.89 billion would decline 4% year over year.

The projected revenue decline for the quarter is due to the expected weakness in China — the company’s second-largest market. But citing improving China demand throughout the quarter, Katy Huberty, analyst as Morgan Stanley, expects Q2 revenue to come in at the “high end” of the company’s guidance. The company’s largest segment, iPhone unit sales, are expected to total $31.1 billion, while Services revenue is projected to reach $11.3 billion.

The Services business, which includes Internet Services, App Store, Apple Music, Apple Care, Apple Pay and licensing, has been Apple’s growth focus. Apple’s transition into a full-fledged services company took a major leap last month when it announced a slew of new services offerings at its Cupertino campus, including its premium streaming video service called Apple TV+. Investors will focus on not only how much revenue Services generated during the quarter, but how Apple guides for the segment for the rest of the year.

At the time of publication, the author held shares of Apple.

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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