Risks rising for Apple shares as analysts expect a blowout quarter

Apple (AAPL) reports the results of its all-important holiday quarter on Jan. 27 and the risks are rising for shareholders.

Expectations for the company have risen sharply —along with the company’s stock price — since last spring, when few investors showed much enthusiasm. Since then, Apple’s share price has gained more than 50%, topping $112 last week. Wall Street analysts’ average price target for the stock has hit almost $123, from the mid-$80s back in April, and three-quarters of analysts have a buy rating on the stock.

According to FactSet, Wall Street is looking for Apple to report earnings per share of $2.59, a 25% increase from a year ago, and revenue of $67.3 billion, which would be a gain of 17%, the biggest quarterly revenue jump in revenue in two years. Estimates have risen sharply as analysts have been raising their forecast of iPhone sales. A year ago, analysts forecast EPS for this quarter of only $2.17 and revenue of $59.6 billion.

But the most important number is probably iPhone sales. It’s hard to pin down Wall Street’s exact average forecast. Some cite a Bloomberg analyst survey of 65.5 million. Fortune Magazine's quarterly survey, which includes pro and amateur Apple analysts, also came in at 66.5 million, but there are a number of analysts clustered around a forecast of about 70 million. That would be a record and a huge 37% gain over last year’s holiday quarter iPhones sales. Many analysts expect the average selling price also rose from last year, thanks to the iPhone 6 Plus.

Recent surveys have added to the excitement. Initial buying interest in the new iPhones matched the highest levels recorded for any update in the line, according to surveys by 451 Research. And three months after the launch, with demand from the biggest iPhone fans already me, buying interest remains stronger than for any previous model. Apple's decision to use bigger screens this time around also seems to be paying off with higher sales in Asia, home to the largest group of "phablet" fans.

With such a strong upgrade cycle in the market, UBS analyst Steve Milunovich expects Apple will exceed the average forecasts for revenue and profits on sales of 67 million iPhones and 22 million iPads. He argues that the stock has further to run.

"We find the buy side somewhat skeptical of the Apple story going forward,“ Milunovich wrote in his earnings preview. "However, we expect strong (December) and March quarters along with excitement following Apple Watch availability to provide upside."

New product uncertainties

Investors will certainly be listening closely for clues about Apple’s future products. It’s not often that Apple even mentions undisclosed products on its earnings call, but the Apple watch has already been unveiled. Analyst expectations for the watch are all over the map, ranging from as low as 10 million sold this year, according to Piper Jaffray’s Gene Munster, to a high of 41 million, predicts Chip Chowdhry at Global Equities Research.

The market still doesn’t know when the watch will actually go on sale and Apple has already said it won’t be breaking out watch sales revenue in detail in its future quarterly results. Even if the watch isn’t mentioned explicitly on this earnings call, analysts will try to discern details like exactly when it will go on sale or the full range of prices from the guidance Apple gives about sales and profit margins for the rest of the year.

Analysts currently expect Apple will report sales of $53.6 billion for this quarter and $212.8 billion for the full fiscal year, with EPS of $2.00 and $7.83, respectively, according to FactSet.

There's less excitement, at least among the investing crowd, about Apple Pay, the company's touchless mobile payment feature. The still-nascent technology doesn't work yet in most stores and Apple receives only a tiny cut of 15 cents out of every $100 transaction. Also, investors should not expect any news about the still-just-rumored, larger iPad Pro. Apple saves new product announcements for special media-filled events, not financial earnings calls.

Do, perhaps, expect snarky insinuations about Microsoft’s (MSFT) augmented reality goggles or Google’s (GOOGL) rumored efforts to become a mobile phone network. CEO Tim Cook has been quick to say what Apple won’t do.