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Factors to Consider Ahead of Apple's (AAPL) Q4 Earnings

Zacks Equity Research

Apple’s AAPL non-iPhone segments — Services, Wearables, Mac and iPad —are expected to have benefited fourth-quarter fiscal 2019 results, scheduled to be released on Oct 30.

The Services business, which includes revenues from Internet Services, App Store, Apple Music, Apple Care, Apple Pay, and licensing and other services, has become the new cash cow for the company. Services revenues accounted for 21.3% of sales in third-quarter 2019.

Moreover, the Wearables business, which includes Apple Watch, Beats and AirPods, is expected to stay in the limelight. In the last reported quarter, revenues from these products accounted for 10.3% of sales.

Apple’s flagship iPhone sales declined in the last couple of quarters, a trend that most likely continued in the fourth quarter, due to stiff competition from Chinese handset makers and sluggish demand. Hence, the performance of these non-iPhone segments will be eagerly watched by investors to measure the success of Apple’s revenue diversification strategy.

Apple Inc. Revenue (TTM)

Apple Inc. Revenue (TTM)

Apple Inc. revenue-ttm | Apple Inc. Quote


Click here to know how Apple’s overall fourth-quarter performance is likely to be.

Apple Updates Portfolio in Q4

Apple started selling new iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max and Apple Watch Series-5 on Sep 20. Additionally, the company’s all-new 10.2-inch, seventh-generation iPad was on sale on Sep 25.

However, given the short time span, the new devices are not expected to have contributed much to the iPhone and iPad top line in the fourth quarter.

The Zacks Consensus Estimate for iPhone revenues stands at $32.30 billion, implying a 13.1% decline from the figure reported in the year-ago quarter.

Moreover, the consensus mark for iPad revenues is pegged at $4.53 billion, indicating 10.7% growth from the figure reported in the year-ago quarter.

Meanwhile, Apple Arcade, a subscription-based gaming service, was also available from Sep 19 in more than 150 countries. Priced at $4.99 a month, the service starts with a free trial.

Moreover, the company announced that Apple TV+ will be launched on Nov 1 at $4.99 per month with a one-week free trial.

Further, on Aug 20, Apple launched its much-anticipated Apple Card in partnership with Goldman Sachs as its issuing bank and Mastercard MA as the global payments network.

Mac Sales Expected to Decline

The third-quarter results reflected Apple’s growing traction among enterprises, driven by collaborations with the likes of AT&T T, IBM and SAP SE. The trend most likely continued in the to-be-reported quarter owing to an updated Mac and iPad portfolio.

However, despite a rebound in the PC market, Apple’s Mac sales are expected to have been negatively impacted by a supply crunch in the to-be-reported quarter. The Zacks Consensus Estimate for Mac revenues stands at $7.38 billion, implying a 0.4% decline from the figure reported in the year-ago quarter.

FAA Bans MacBook Pro From Flying

Notably, during the fourth quarter, the U.S. Federal Aviation Administration (FAA) banned some MacBook Pro models after Apple recalled hundreds of thousands of its 15-inch devices in June citing a battery overheating issue, which therefore increased fire risk. The FAA also said that it had alerted major U.S. airlines about the recall.

In August, the European Union Aviation Safety Agency allowed passengers to carry the devices as long as they were switched off and not used. The devices were sold between September 2015 and February 2017.

Legal Woes & Antitrust Investigation

Apple’s legal problems increased in the fourth quarter.

Russia’s Federal Antimonopoly Service started investigating Apple for monopolistic practices after Kaspersky approached it. 

Apple was also sued by the adult guardian of a child in a San Jose federal court for violating California’s privacy law that prohibits the recording of people without their permission.

Moreover, U.S. District Judge William H. Orrick allowed a group of consumers to continue with a class-action lawsuit against Apple for providing refurbished products under its AppleCare and AppleCare+ protection plans.

Notably, Apple along with Alphabet is facing investigation by the U.S. Department of Justice (DOJ). The Federal Trade Commission is running investigations on Amazon and Facebook FB.

Although these issues are not expected to have financially impacted the stock in the to-be-reported quarter, they surely increase investment risks.

Zacks Rank

Apple currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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