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Factors to Consider Ahead of Apple's (AAPL) Q2 Earnings

Zacks Equity Research

Apple AAPL is set to report second-quarter fiscal 2019 earnings on Apr 30.

Notably, the company beat the Zacks Consensus Estimate in the trailing four quarters, the average positive surprise being 3.5%.

Apple’s fortunes are tied to iPhone, which is by far its biggest revenue contributor. The device accounted for 61.7% of net sales in the last reported quarter, wherein sales declined 15% from the year-ago quarter to $51.98 billion.

For second-quarter fiscal 2019, revenues are projected between $55 billion and $59 billion. The Zacks Consensus Estimate for revenues is pegged at $57.54 billion, indicating almost 6% decline from the year-ago quarter’s reported figure.

Moreover, the consensus mark for earnings is currently pegged at $2.37 per share, unchanged over the past 30 days. The figure indicates a 13.2% decline .
 

Apple Inc. Price and EPS Surprise

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

 

iPhone Sales Estimated to Decline in Q2

Apple’s iPhone sales are expected to remain subdued owing to lower demand in Greater China. Notably, a slowing economy and excessive inventory with retailers hurt smartphone sales in February 2019, according to data provided by the China Academy of Information and Communications Technology (CAICT), quoted by CNBC.

Smartphone shipments fell 20% year over year to 14.51 million in China. According to CAICT, this marked the steepest decline in the month of February since 2013.

Notably, in January, smartphone shipment in China declined 11.4% year over year to 32.15 million. The consecutive quarterly decline doesn’t bode well for Apple.

Although Apple and its retailers have lowered iPhone prices in China, we don’t expect the move to positively impact sales due to stiff competition from the likes of Vivo, OPPO and Huawei.

These companies are offering top-quality hardware and innovative features in their devices in the premium smartphone market ($500-$800 price range). The significant price-gap between these devices and iPhone has negatively impacted Apple’s market share.

Per TheStreet, to drive sales in China, Apple entered partnerships with local banks as well as Alibaba’s BABA division, Ant Financial, to offer interest-free financing for iPhone. This along with several discount offerings might have a positive impact on Apple’s iPhone user base in the to-be-reported quarter.

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

The Zacks Consensus Estimate for iPhone sales stands at $31.22 billion, indicating almost 18% decline from the year-ago quarter’s reported figure.

Services Segment a Key Catalyst

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

App Store’s growth can be attributed to a strong developer base and the richness of apps. Apple is encouraging developers to use AI and machine learning in their apps. We believe that growing numbers of AI-infused apps will attract more subscribers on App Store.

Moreover, Apple’s endeavor to open up its ecosystem through partnerships with the likes of Samsung (for iTunes) and Amazon AMZN is a positive for the Services segment.

Further, higher consumer spending on streamed music, evident from an increasing number of paid subscribers, bodes well for Apple.

Apple Music’s availability on Amazon Echo devices and Fire TV is helping it expand footprint and compete better with Spotify SPOT. The partnership with Verizon VZ is also noteworthy in this regard.

Further, Apple Pay’s expanding international footprint is significant

The consensus mark for Services revenues stands at $11.16 billion, indicating more than 21% growth from the year-ago quarter’s reported figure.

Zacks Rank

Currently, Apple 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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