Apple Q3 watch

For Apple shareholders, a terrible near 9-month rout would surely be nearing its end, as the group prepares to unveil third quarter results, if markets were rational.

 

As we know, bourses don’t always merit the term. Instead, the stock has fallen 28% from all-time highs since May 2015 to date, including a 7% drift lower so far in 2016.

The casual observer would be forgiven for assuming that Apple’s sales fell in 2015. Nope. In fact they advanced a respectable 28% in Apple’s financial year to the end of September, which also saw profits rising by more than a third.

True, earnings dipped by an alarming extent annually in this year’s March quarter, and more to the point, there was an unprecedented drop of 10 million units in sales of Apple’s main revenue earner, iPhones.

 

But to describe even these upsets as by now fully priced is quite an understatement.

 

Furthermore, they will be somewhat moot if forecasts that handset sales will grow at least 5% in the year to 2017 turn out to be correct.

Admittedly forecasts for iPhone sales in Apple’s 2016 are more in question. Handset sales are expected to decline as much as 10%.

Again though, for Wall St., this will hardly be news by now and the same goes for forecasts of how Cupertino, California’s most famous resident performed in its third quarter.

 

 

The effect ought to lower the threshold of expectations somewhat, especially given that Q3 is typically one of the Apple’s least sparkling quarters for sales and product milestones, and given that Apple is forecast to approximately match iPhone sales of Q3 2015.

In theory, that should enable a less punishing delta of share price reaction on the downside in the event of moderate disappointment. Conversely, of course, should Apple outperform, the stock price upside could be exaggerated too.

This is of course a different dynamic of investor expectations than the one which typically prevailed ahead of Apple earnings in what might go down as its ‘glory years’.

During that era, quarter after quarter of outperformance in Apple’s most closely watched metrics conditioned investors to expect consecutively higher orders of earnings and handset ‘beats’.

It was an unsustainable gradient, and perhaps one of the positives to emerge from Apple’s revenue and sales slowdown over the last year is that investors might now have set their sights lower—maybe.

If we’re correct, so long as Apple’s third quarter results are in the ballpark of expectations, the group will have an opportunity to shape investor sentiment in a direction of its choosing, particularly at Tuesday night’s conference call with analysts and senior executives.

Here’s a summary of the most important forecasts for Apple’s Q3.

Generally, they’re based on consensus estimates from reliable data providers like Thomson Reuters, Bloomberg, and FactSet Research.

However the handset projection is based on compiled media reports augmented with our own rudimentary supply chain monitoring. This means that our iPhone estimate may be wide of the mark.

 

Q3 FORECASTS

• Revenues: $42.035bn, down 15% year-on-year (Y/Y)
• Earnings per share (GAAP): $1.40, down 24.4% Y/Y
• Net income (GAAP): $7.771bn: down 27% Y/Y
• Gross profit margin: 38%, vs. 39.4% in Q2 and 39.7% in Q3 2015
• iPhone sales:  42-46 million handsets vs. 47.5 million in Q3 2015

 

MAIN Q4 GUIDANCE EXPECTED

• Revenues: $45.9bn, down 10% Y/Y
• Earnings per share (GAAP): $1.62, down 17.4% Y/Y

 

WHAT TO WATCH

We will particularly be listening out for fresh information and guidance on major topics outlined below.

What all Apple fan boy/girls and stock buyers most want to know more about is the long-trailed next gen iPhone, the ‘iPhone 7’.

There is certainly scope for disappointment, if early leaks turn out to have substance.

Assiduously sourced reports in the WSJ.com and less credible blogs have suggested only subtle technical feature advances will be implemented in its next flagship handset. It may again come in 4.7 and 5.5 inch varieties. Eye-catching changes and techno wow are now widely expected to wait until 2017, an opportune year to introduce them as it will be the iPhone brand’s 10-year anniversary.

A smaller incremental advance in the next iPhone may only have a moderate impact on Apple’s outlook for the quarter ending in September but it will be an important subject to get to grips with because the new handsets will be introduced two week before that quarter is up.

Hence, Apple’s forecasts will be a good signal about how Apple expects ‘iPhone 7’ to sell.

Are we talking iPhone 6-like volumes? Or are we going to get more iPhone 5c-like numbers?

iPhone average selling prices in the quarter will also be interesting in this regard, as will guidance on ASP for Q4.

Again, if less-expensive handsets, like the iPhone SE introduced in March 2016 are expected to be big in the mix late this year that will have a bearing on revenue forecasts and margins.

Perhaps one of the most promising developments for the group over the last few years has been its emergence as a software company.

I mean a software company with sales that have begun to capture Wall St.’s attention. Apps, music (streamed and downloaded), payments and more, broke the 20%-growth threshold in Q2 (March) coming in at $6bn.

Investor cheers over services therefore has the capacity to offset any let-down on the hardware side, or supplement any solid performance from the latter too.

Wall St. is looking for software and cloud to bring in a figure around the same as Q1, which would be up around 18% year-on-year.

Cash returns will not be the least object of investor curiosity, with Apple having done little to dispel the notion that it will seek to return to shareholders a portion of the record $70bn it had in the bank at end-2015.

Whether or not Apple can expand upon its already eye-watering plan announced in April to reimburse investors a total of $250bn by March 2018 remains to be seen.

 

 

SHARES

Suffice to say this stock is no longer overvalued. Its forward price/earnings ratio is rated about 34% lower than the US benchmark.

It might be indicative that the biggest open interest in Apple options trading right now is in calls, offering the right to buy shares at $100, almost $2.50 higher than the current price.

40,900 of these contracts have been bought and they expire this Friday.

That suggests a substantive cohort of studious investors is bullish on the stock in the very near term.

Trading motives will seldom be that simple for the experienced though.

First of all, $100 is a big round juicy psychological number which is as likely to attract selling or profit taking as follow through buying.

That said—this is Apple.

It’s reasonable to expect a degree of pent-up demand is waiting on the sidelines to reinvest in Apple at the first sign of substantive revenue hardening.

Signals which are deemed convincing enough may be heard on Tuesday night.

From a technical perspective, Apple’s chart has a number of constructive motifs despite the wider picture being one of a rather disappointing decline.

 

 

 

Perhaps most promisingly and obviously, AAPL has formed a rather expansive (and inelegant) channel from lows in May 2016.

A closer look reveals several recent flags in the share’s ascent early this month to a test of the half-way point (50%) of the decline from 2016 highs in April.

That ascent was itself enclosed within a reasonable channel before it collapsed last week.

Zooming tighter into the hourly view we note, the shares were testing the 200-interval moving average (blue) at the time of writing, suggesting the most visible litmus test of the market’s reaction to Apple’s Q3 2016 will be willingness of investors to buy it above this line.

 

We could certainly expect disappointment to lead to a breach, with little clear discernible support before the bottom of the large rising channel we mentioned earlier.

Again, in that case, if the share were to again re-approach what’s turned out to be fabled support  around $92/93, it could be just as much an incentive for pent-up buying, as follow-on selling.

A satisfied Wall Street would likely lift the shares above near-term resistance around late $97s with an eye on the important 38.2% Fibonacci interval of this year’s slide.

Such a move would also begin to tip the balance towards a medium-term trend change too.