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Apple (AAPL) Stock Outlook: Q2 Earnings, iPhone Sales & Services Growth

Benjamin Rains

Shares of Apple AAPL have climbed over 20% this year, along with FAANG peers Netflix NFLX and Facebook FB, to outpace the S&P 500’s 13% jump. Apple and CEO Tim Cook hope that new Services like Apple TV+ will propel long-term growth for the tech titan. But despite its new offerings and its 2019 climb, Apple’s near-term outlook appears rough, especially in terms of iPhone sales.

Recent News & Overview

Apple just recently lowered the price of many of its products, including iPhones, iPads, Macs, and AirPods, on its online store in China, according to multiple reports. Prices on these products were lowered by roughly 6% on average and come after official Chinese third-party Apple sellers such as Alibaba’s BABA Tmall and JD.com JD lowered some Apple prices earlier this year. Apple’s new price cuts have been attributed to the recent reduction of a value-added tax in China from 16% to 13%.

It is unclear if Apple’s lower prices will positively impact sales in the market that has for years offered a range of much less expensive smartphones from the likes of Xiaomi and Huawei. Investors might remember that Apple stock plummeted at the start of the year after Cook warned shareholders of a major slowdown in China and lower-than-anticipated iPhone sales.

AAPL’s first-quarter revenue ended up falling 4.5%, driven by a 15% drop off in iPhone sales and a 27% decline in revenue in Greater China. The world’s second-largest economy, which includes Hong Kong and Taiwan, accounted for roughly 16% of quarterly sales, while iPhone sales were responsible for 61% of Q1 revenue.

Since the disappointing quarter, Apple has focused on its Services future. The company last week unveiled its long-awaited streaming TV platform that hopes to one day compete alongside Amazon AMZN Prime, Netflix, Hulu, and Disney’s DIS soon-to-launched streaming service. Apple also showed off its $9.99 per month, magazine-heavy news service, a new Apple credit card in partnership with Goldman Sachs GS, and a subscription-based gaming offering called Apple Arcade.

 

 

Outlook

Apple’s Services business has been closely watched by Wall Street for years, but the unit that includes Spotify SPOT competitor, Apple Music and more, will face even more scrutiny going forward. But before we look at what to expect from Services, let’s see how Apple’s biggest units are projected to perform this quarter.

Overall, Apple’s adjusted second-quarter earnings are projected to sink 13.2% on the back of a 5.8% decrease in quarterly revenue. Peeking further ahead, Apple’s full-year 2019 revenue is expected to dip 4.1%, with its adjusted EPS figure projected to fall at a similar rate.

More specially, Q2 iPhone revenue is projected to tumble roughly 19.5% from $38.03 billion in the year-ago period to $30.57 billion, based on our current NFM estimate. This would mark a larger year over year decline in Apple’s most important business than Q1. Meanwhile, Apple’s Services unit is projected to jump nearly 23% from $9.19 billion to reach $11.29 billion. Investors will likely be pleased to note that this estimate comes in above Q1’s 20% Services growth.

 

 

Bottom Line

As we mentioned at the top, shares of Apple have climbed over 20% this year. With that said, AAPL stock still rests 18% below its 52-week high of $233.47 per share. This gives the stock more room to run heading into its second-quarter earnings release, which is expected in early May.

Apple is currently a Zacks Rank #3 (Hold) based on its mixed earnings estimate revision activity. The company clearly faces a substantial downturn ahead. But if investors and Wall Street know to expect lower iPhone sales and top and bottom-line declines, there might be a better chance that Services growth can help propel the stock forward.

Apple’s overall near-term outlook could be hard for some to swallow, but the iPhone market is still one of the world’s largest companies. Therefore, along with its massive pile of cash, its quarterly dividend, and industry-matching valuation, Apple stock might be worth buying or holding onto.

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