Factors Setting the Tone for Apple's (AAPL) Q1 Earnings

AppleAAPL is set to release first-quarter fiscal 2019 earnings on Jan 29.

The company's fortunes are tied to iPhone, which is by far its biggest revenue contributor. The device accounted for 59.1% of net sales in the las t report ed quarter, when the company sold 46.89 million units of iPhone.

Although unit shipment growth was flat, segment revenues were 20% higher. This was primarily due to 28.3% boost in iPhone ASP, which was $793 in the quarter.

However, given the saturated developed markets and declining demand for iPhone in Greater China, strong ASP growth might not be enough to drive the top line in the to-be-reported quarter. The Zacks Consensus Estimate for ASP currently stands at $794.

Notably, Apple cut its guidance on Jan 2, blaming China's slowing economy and fewer upgrades to its flagship device. China accounts for almost one third of the company's sales. The consensus mark for revenues from China is $17.13 billion.

Apple Inc. Price and EPS Surprise

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

Apart from weak China demand, Apple is also suffering from its failure to penetrate rapidly growing but price sensitive markets of Asia, particularly India. The steep pricing of new iPhones is making it difficult for the company to gain market share in India where Chinese smartphone makers like Xiaomi dominate.

While the consensus mark for iPhone unit sales stands at 65.43 million, revenues are estimated to be $52.27 billion.

Apple Banks on Services Growth

The Services segment has become the new cash cow for Apple and is expected to grow strongly, driven by increasing popularity of App-Store, Apple Music and Apple Pay.

In the last reported quarter, Services revenues increased 17% year over year to $9.98 billion and accounted for 15.9% of sales. Apple stated that paid subscriptions have surpassed $330 million, an increase of more than 50% year over year.

Apple also recently stated that customers spent $1.22 billion during the 2018 holiday season, which drove services revenues to record level.

App Store's growth can be attributed to a strong developer base and the richness of apps. Apple is encouraging developers to use artificial intelligence (AI) and machine learning in their apps. The company's Core ML 2 API helps developers recognize faces or animals in photos, and parse the meaning of text. Further, the company's Create ML for simple and efficient machine learning training on the Mac is built on top of Swift programming language.

Notably, Apple has hired former Google head of search and AI, John Giannandrea to lead its restructured AI division that includes the machine learning division, Siri team and the Core ML API team. In addition to all these, acquisition of start-ups like Silk Labs enhances the company's expertise in the domain.

We believe that growing numbers of AI-infused apps will attract more subscribers on App Store. Moreover, Apple's endeavors to open up its ecosystem, through partnerships with the likes of Samsung and Amazon AMZN , are positives for the Services segment.

Apple Music's availability on Amazon Echo devices is expected to boost the iPhone maker's footprint against Spotify, which is currently the dominant player in the paid, premium music streaming market. Spotify has a user base of 191 million compared with that of Apple's roughly 56 million. The latest partnership with Verizon is also noteworthy in this regard.

Further, Apple Pay's expanding international footprint is noteworthy. In the last quarter, the company launched Apple Pay in Germany. The service is supported by 15 banks, including Deutsche Bank.

Apple estimates Services revenues of more than $10.8 billion in the to-be-reported quarter. The consensus mark stands at $10.82 billion.

Earnings Estimates Down

Notably, Apple beat the Zacks Consensus Estimate in each of the trailing four quarters, average positive surprise being 3.9%.

The company's fourth-quarter fiscal 2018 earnings of $2.91 per share beat the Zacks Consensus Estimate by 12 cents.

For first-quarter fiscal 2019, the consensus mark for earnings is currently pegged at $4.17 per share, down 10.5% over the past 30 days.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP has a good chance of beating estimates. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Apple has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell, before they're reported, with our Earnings ESP Filter .

Stocks to Consider

Here are a couple of stocks you may consider, as our proven model shows that these have the right combination of elements to post an earnings beat this quarter:

Twitter TWTR has an Earnings ESP of +26.55% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Lumentum Holdings LITE has an Earnings ESP of +1.1% 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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