Amid a flurry of earnings reports in late April, the one report that all investors should have their eyes on is second quarter earnings from Apple (NASDAQ:AAPL) stock, which are due after the bell on Tuesday0.
This earnings report is critical for Apple stock for one big reason: it will provide answers to the Services growth versus iPhone slowdown debate. Broadly speaking, Apple’s iPhone business — which has been its bread-and-butter for the past decade — has slowed dramatically over the past several months. In late 2018, this slowdown killed Apple stock. But, in early 2019, Apple stock has surged higher despite the slowdown, mostly because investors have shifted their focus to the growth potential in the Services business.
In other words, investors see Apple stock as continuing to be a winner, despite a slowing iPhone business, because of ramp in the company’s Services business.
Q2 earnings will serve to help confirm or negate that thesis. It’s pretty much the consensus that iPhone numbers won’t be great this quarter. Thus, everything rests on the Services business. If those numbers are great, and offset iPhone weakness, Apple stock could surge back to all time highs. If the numbers aren’t great, and don’t offset iPhone weakness, Apple stock could give up a big chunk of its 2019 gains.
So, what will happen with Apple stock following Q2 earnings? Let’s take a deeper look.
Apple Stock’s iPhone Numbers Will Be Weak
The consensus from Wall Street is that this quarter’s iPhone numbers won’t be great.
Ahead of the earnings report, multiple Wall Street firms have issued warnings about continued iPhone weakness. In early April, Apple cut iPhone prices in an apparent attempt to clear excess inventory. But according to Lynx Equity Strategies, those cuts didn’t work, and the company is still sitting on excess iPhone inventory. Over the past month, Cleveland Research, Wells Fargo, Credit Suisse, and HSBC have all similarly sounded a cautious tone on iPhone sales trends. Plus, OTR Global’s numbers imply that Apple missed iPhone shipment estimates this quarter by a wide margin.
Broadly speaking, then, the news flow coming out of Wall Street has been largely negative on iPhone sales trends over the past few months.
This makes sense. China’s economy is rebounding, and that should help lift iPhone sales some. But the big issue here isn’t a China slowdown. Rather, it’s global smartphone market saturation. Pretty much everyone who wants a smartphone already has one. Thus, new phone buyers every year are now largely restricted to replacement buyers and switchers.
Overall, then, Apple’s iPhone business likely didn’t rebound this quarter, nor will it rebound anytime soon. Instead, this business projects as a largely flattish business with some upside through higher ASPs over the next few quarters.
Services Numbers Will Be Strong
While iPhone numbers will be weak this quarter, Services numbers should be fairly strong.
The Services numbers have been really strong for several years now. There’s no reason to believe that this strength ended in early 2019. Instead, there were a few catalysts in the quarter which may have provided a lift to the business.
First, Apple Music reportedly overtook Spotify (NYSE:SPOT) in terms of paid U.S. subscriptions in April, and is now the biggest music streaming platform in America. Second, Apple launched News+, its curated news subscription service, and over 200,000 people signed up for the service within the first 48 hours. Third, Apple has been hiring more software people than hardware people, a sign that the Services business is indeed ramping with great pace. Fourth, pretty much all the mobile-first companies — namely, Facebook (NASDAQ:FB), Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) — reported strong usage numbers this quarter, implying that smartphone usage has been very healthy in early 2019.
Overall, then, Apple looks positioned to report strong Services number after the bell. But, will those numbers be strong enough to offset iPhone weakness?
Bottom Line on AAPL Stock
Long story short, Apple’s Q2 numbers will likely reflect continued Services strength and continued iPhone weakness. That combination should cause a nice pop in Apple stock.
Why? Because the Services business is the future, and the iPhone business is the past. Thus, if the past is weak but the future is strong, that’s a good thing, not a bad thing. Investors will react positively.
As such, the big takeaway here is that strong Services numbers in the Q2 print should offset weak iPhone numbers, and ultimately help preserve the big year-to-date rally in Apple stock.
As of this writing, Luke Lango was long AAPL, SPOT, and FB.
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