The Q4 results from Apple are never the most important, but as ever they will contain key guidance on the next quarter’s expected iPhone sales and wider performance of the company.
The Street expects EPS of $2.84, short of the $2.91 in the same quarter a year ago, on revenues of $62.9bn, flat on last year, which was a record. In the last update, investors were particularly impressed by robust Q4 guidance which was ahead of the Street’s expectations. Apple guided revenue to between $61bn and $64bn versus expectations of $60.9bn prior to the Q3 report. The Q3 numbers broadly showed that consumers are still extending the upgrade cycle and holding on to iPhones longer but stickiness in the Apple ecosystem remains strong. The 13% growth in Services was a disappointment and represented another quarter of deceleration. However, excluding a couple of one-off items, the growth was more like 18%, according to Tim Cook.
Apple has beaten EPS expectations every quarter for the last two years. Wall Street analysts have been consistently upgrading their expectations for the stock and raising price targets over the last quarter.
What to watch
Number one is the guidance for the 2020 fiscal first quarter. This is pivotal to our understanding of how well Apple thinks the iPhone 11 is doing – there is only 10 days of iPhone sales included in the Q4 release. The recent strong performance of the stock reflects increased confidence in the iPhone 11 as well as growing hopes for next year’s expected 5G phone. The iPhone 11 has done way better than expected before its launch. We’ll get a first glimpse of iPhone 11 sales in Q4 – the market is expecting Apple to sound bullish on demand for the forthcoming holiday quarter.
Given the backdrop of slowing growth in China, Hong Kong protests and the Sino-US trade war, investors will be watching for the Greater China sale with interest. This has been a problem area for Apple but there have been more encouraging signs, particularly with the lower priced iPhone 11 catching the interest of Chinese consumers. Investors will also want an update on how potential tariffs will impact the business.
Services revenues will be another key area as Apple looks to pivot towards this side of the business. Growth in Q3 was modest versus comparisons from last year, although that was down to one-off items. However, the launch of a range of new services like Apple TV+ should underpin further growth, albeit not so much in the reported period. Key to the rerating of the stock and to support the higher multiples we’ve got now is for this division to do well.
On that front we are also looking at margins. Services makes up about 20% of Apple’s revenue, up from c16% a year before. Margins from Services is around 64%, vs roughly 31% for hardware. The question is at what point can Apple start to significantly guide its margins higher? As we said in July: “This could be an area for an upside surprise, if not now then perhaps heading into the year-end.” Apple has guided gross margin between 37.5% and 38.5% for Q4.
Also expect strong performance in Wearables, which now account for about 10% of sales. Mac sales may be a touch softer due to supply problems.
The stock has rallied through the $240 mark to break new all-time highs although it’s seemingly hit resistance at the $250 round number. The stock has rallied about 8% since it released its new iPhone range – this may be an indicator the market is expecting upgraded guidance off the back of higher-than-expected iPhone sales. A strong Q4 is already priced in.
Indeed, we may add that earnings multiples appear stretched. The trailling 12-month PE ratio has risen above 20 versus an average of 15 over the last 5 years. Whilst there may be encouragement that this is about a re-rating of the stock as it pivots away from being a hardware business to a services business, it makes it ripe for sellers on any miss, although Tuesday’s selloff helps on that front.
Downside break could see $232 retested. Upside look for the $250 level as the barrier to further gains.
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