Apple (AAPL) Q1 Earnings: What's in the Cards this Time?

Apple, Inc.AAPL is set to report its first-quarter fiscal 2017 results on Jan 31. Last quarter, it posted a 0.60% positive earnings surprise. The company has outperformed the Zacks Consensus Estimate in three of the last four quarters with an average positive earnings surprise of 0.11%.

Let's see how things are shaping up prior to the announcement.

Factors to Consider

Investors will be looking forward to sales numbers for iPhone 7 and 7 Plus. iPhone continues to the primary revenue contributor for Apple. Slowdown in the demand for iPhone has emerged as a big concern for Apple. Over the past one year, sales have dipped given overall weakness in the smartphone market, observe analysts. Per analysts, waning demand from markets like China and U.S., which are Apple's biggest markets, has been widely reflected on iPhone sales numbers.

Also, competition from local players has been hindering iPhone growth in China. In the fourth quarter of fiscal 2016, Apple iPhone unit sales came in at about 45.5 million, down 5% year over year. Revenues from iPhone also declined 13% from the year-ago quarter to $28.2 billion (60% of total revenue).

Plus analysts also observe that the hype surrounding iPhone 8 will also dent sales. iPhone 8 is set to be launched later this year, marking the tenth anniversary of the revolutionary iPhone. It reportedly has amazing features like a glass body, a dual curved edge-to-edge OLED display with a built-in Touch ID sensor and wireless charging. What is more exciting is that Apple is rumored to launch three iPhones (instead of two) including a new 5.8 inch model. All this is likely to put consumers on hold for some more time. iPhone 8 is already dubbed as a "super cycle".

However, given the troubles in iPhone, Apple has been focused on other drivers like Services, Music and App store to boost revenues. A few days back, Apple announced that its App Store generated sales of more than $20 billion for developers in 2016, up 40% from 2015. Apple keeps 30% of all App Store sales. Apple stated that its top grossing markets were the U.S., China, Japan. China witnessed growth of over 90% year over year.

Apple also announced that Apple Music has crossed 20 million paid users. Apple's Services business is also expected to remain strong as it is mostly dependent on the already installed Apple devices.

Plus, it continues to increase focus on emerging markets to boost iPhone sales. In the last few months, Apple has increased its focus on India, which is expected to become the second largest smartphone market in the world. In fiscal 2016, Apple sales in India grew approximately 50% over the prior fiscal. Also, a robust cash position and shareholder friendly policies are long-term positives.

For the first quarter of fiscal 2017, Apple forecasts revenues in a range of $76 billion to $78 billion.

Gross margin is expected within 38% to 38.5%, while operating expenses are projected within $6.9 billion to $7 billion. Other income/ (expense) is likely to be $400 million, while tax rate is expected to be 26%.

Apple Inc. Price and EPS Surprise

Apple Inc. Price and EPS Surprise | Apple Inc. Quote

Earnings Whispers?

Our proven model does not conclusively show that Apple will beat earnings estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP : Apple has an Earnings ESP of -0.93% as the Most Accurate Estimate is $3.19 while the Zacks Consensus Estimate is pegged higher at $3.22. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Apple's Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or # 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are a couple of stocks worth considering that, as per our model, have the right combination of elements to post an earnings beat this quarter:

Western Digital Corporation WDC with an Earnings ESP of +12.73% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Oclaro, Inc. OCLR with an Earnings ESP of +10.53% and a Zacks Rank #2.

Facebook Inc. FB with an Earnings ESP of +0.89% and a Zacks Rank #2.

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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.

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