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Apple (AAPL) to Report Q3 Earnings: What's in the Cards?

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Apple AAPL is set to release third-quarter fiscal 2018 earnings on Jul 31.

As usual with the company, iPhone shipment growth will hog the limelight, in this seasonally slow quarter. However, performance of the service business and wearables will also be eagerly watched by investors in order to get a measure of the success of the company’s revenue diversification strategy.

Impressive Earnings Trend

Apple beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average positive surprise being 5.10%.

The company’s second-quarter fiscal 2018 earnings of $2.73 per share and revenues of $61.14 billion beat the Zacks Consensus Estimate of $2.69 and $60.99 billion, respectively.
For third-quarter fiscal 2018, the Zacks Consensus Estimate for revenues is currently pegged at $52.37 billion, reflecting year-over-year growth of almost 15.3%.

Moreover, the Zacks Consensus Estimate for earnings has remained steady at $2.19 over the last seven days, reflecting year-over-year growth of 31.1%.

Apple Inc. Price and EPS Surprise

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

Will Higher ASP Boost iPhone Sales?

Apple’s focus on “aggressive pricing” that resulted in a higher average selling price (ASP) from premium models — iPhone X, iPhone 8 and iPhone 8 Plus — is likely to boost the top line, despite lower shipments.

However, the expensive price tag might prove to be an impediment in countries like China, which remains an important market for Apple, given the growing number of middle-class customers.

Moreover, the third quarter is seasonally slow and consumers are likely to postpone purchases, due to the upcoming product refresh cycle. Apple is expected to launch three iPhone models in 2018.

Although Apple’s smartphone market share has increased, weakness in demand for premium and high-end smartphones doesn’t bode well with iPhone shipments. Also, intensifying competition from regional players, who are offering feature-rich smartphones at a much cheaper price, remains a major headwind.

Notably, for the third quarter, the Zacks Consensus Estimate for total iPhone units is pegged at 41.29 million. The Zacks Consensus Estimate for revenues from iPhone is pegged at $28.65 billion.

Service & Wearables Businesses Are Key Catalysts

Apple's Services segment, which includes revenues from Internet Services, App Store, Apple Music, AppleCare, Apple Pay, and licensing and other services, has become the new cash cow for the company.

The App Store is a key revenue contributor for the Service business. Per a recently released report by Sensor Tower, the App Store has once again surpassed Alphabet’s GOOGL Google Play in terms of revenues, in the first half of 2018. The growth was driven by increase in spending for subscription-based applications such as Netflix, Tencent Video, Spotify and Tinder.

App Store’s growth can also be attributed to a strong developer base as well as richness of apps. Notably, the store currently has over 2 million apps and is also home to over 3,000 augmented reality apps.

Moreover, the wearables business, which is now the size of a Fortune 300 company, holds significant promise for Apple. In the last reported quarter, wearables and home products accounted for more than 90% of the total growth in the Other Products category.

What Our Model Says

According to the Zacks model, a company with 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 #2 and an Earnings ESP of -1.64%, which indicates an unlikely positive surprise. 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:

Vishay Intertechnology VSH has an Earnings ESP of +2.41% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Upland Software UPLD has an Earnings ESP of +0.93% and a Zacks Rank #1.

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