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Apple to Report Q4 Earnings: Will It Beat Estimates Again?

We expect Apple, Inc.AAPL to beat expectations when it reports fourth-quarter and fiscal 2015 results on Oct 27. Last quarter, it posted a 2.78% positive earnings surprise. It is noteworthy that Apple has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive earnings surprise of 9.02%.

Why a Likely Positive Surprise?

Our proven model shows that Apple is likely to beat earnings because it has the right combination of two key ingredients. 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. The combination of Apple's Zacks Rank #2 and Earnings ESP of +1.60% makes us very confident in looking for an earnings beat this quarter.

Factors at Play

Last quarter, Apple delivered phenomenal growth of over 44% in earnings and 33% in revenues in its third-quarter fiscal 2015 results. But the tech giant did ring some warning bells by providing a soft view for its top line. Thereafter, the company went through a rough patch, which wiped out a significant portion of the gains it made in the past one year.

However, historically, the fourth quarter has been a strong one for Apple as the company launches its most important offerings during this time. This September, Apple launched the new iPhones (6s and 6s plus) along with a slew of new products including Apple TV with Siri, application updates for Apple Watch and the new iPad Pro with a bigger screen and a stylus named Apple Pencil.

At first glance, it seems that the demand for iPhone 6s is a bit lower than last year's iPhone 6 range. However, if we look more closely, this time around, the most important offering (yes, besides the iPhone) was the new upgrade plan, that is expected to be a significant growth driver. This quarter also saw the company release the new iOS9 and Watch OS2 software, both of which have been revamped with some key new features to improve the user experience.

This apart, leveraging on its strength in China, Apple has taken some strategic initiatives to entrench its presence in the region despite the ongoing slowdown in the economy. This was the first time that the company made iPhones available in the region in the initial phase of launch itself. In addition, last month, the company also made Apple Pay and Apple Music available in China.

According to recent statistics, Apple Music has been doing pretty well even after the end of the three-month trial period. Additionally, Mac has also been gaining market share despite the continued slump in the PC market.

We believe that Apple's venture into new markets (like Apple Watch, Apple Pay, Homekit, Healthkit, Apple Music, Apple TV, Apple Car and others) is strengthening its ecosystem considerably for an unmatched user experience. This along with its solid business model, technological prowess and the sheer size of resources make it a formidable force.

Apart from this, other revenue drivers to watch out for ahead of this quarter's results include sales from iTunes, the App Store as well as Apple's software and services businesses. Further, its collaborations with IBM Corp. IBM and Cisco CSCO are likely to be accretive to the fourth quarter and beyond.

Another Stock to Consider

Another company that according to our model has the right combination of elements to post an earnings beat this quarter is

Facebook, Inc. FB with an Earnings ESP of +5.71% and a Zacks Rank #1.

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APPLE INC (AAPL): Free Stock Analysis Report

INTL BUS MACH (IBM): Free Stock Analysis Report

CISCO SYSTEMS (CSCO): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

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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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