Earnings Preview: What Might Be Expected When AAPL Reports?

Tech sector earnings continue with iPhone-maker Apple Inc. (NASDAQ:AAPL) reporting fiscal Q2 results after market close May 2. Here’s what might be expected.

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Last week ended with a string of results from some of the biggest companies in the tech sector. Positive results continued with earnings beats from Amazon (AMZN), Alphabet (GOOG, GOOGL), and Microsoft (MSFT). AMZN and GOOG also beat revenue estimates, but MSFT came up shy of Wall Street’s top-line estimates. Tech earnings continue this week with Apple (AAPL) reporting fiscal Q2 results after market close tomorrow. 

AAPL is expected to report earnings of $2.01 per share, up from $1.90 in the same period last year, on revenue of $52.61 billion, according to consensus third-party analyst estimates. In the last quarter, AAPL reported all-time record quarterly revenue on strong holiday results, with international sales accounting for 64% of the quarter’s revenue, according to its earnings press release.

The big focus this quarter is on the company’s flagship smartphone products. iPhone sales are expected to increase 4.3% from a year ago, according to Wall Street estimates. In the last quarter, AAPL benefited from a rise in average selling prices, jumping to $695 from $619 in fiscal Q4. The company attributed the increase to a “very strong product mix and the amazing success of iPhone 7 Plus” on its earnings call.

Analysts at Raymond James think smartphone sell-through weakened in the U.S. in the past quarter, which matches softer demand reported in recent earnings from Verizon (VZ), AT&T (T) and T-Mobile US (TMUS). Later this year, the company is expected to launch a new version of its iPhone.  

Apple (AAPL) Business Divisions on Thinkorswim

FIGURE 1: AAPL’S BREAD AND BUTTER AT END OF LAST QUARTER.

The iPhone is by far AAPL’s most important product, accounting for over half the company’s value. Its Services division continues to grow.  The Trefis price estimate vs. current market price is as of 5/1/17. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platformTrefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Potential Benefit of Recently Announced Tax Plan

Many tech companies could potentially benefit from President Trump’s tax plan if it is passed in its current form. CFRA analysts think AAPL would be one of the “biggest beneficiaries from the possibility of foreign cash repatriation and/or lower tax rate by the new administration”. AAPL has been using its cash holdings to fund a capital return program of $250 billion through share repurchases and dividends—so far it’s returned $201 billion of that total amount. At the end of the last quarter, AAPL had $230.2 billion in cash plus marketable securities outside the United States, according to CFO Luca Maestri.

Apple Trading and Options Activity

Since the start of the year, AAPL stock is up just under 24%. That’s outpaced the NASDAQ (COMP) as well as several of its tech peers, shown in figure 2 below. Some analysts caution that rally could include a lot of anticipated growth, potentially diminishing future returns.

The options market has priced in just over a 3% potential stock move in either direction around the company’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading at the May 5 weekly expiration, calls were active at the 144 and 145 strike prices while puts were active at the 138 and 140 strikes. The implied volatility sits at the 61st percentile. AAPL is heavily traded so keep in mind this data will change leading up to when the company reports.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

AAPL YTD Performance Compared to MSFT, GOOG and SPX

FIGURE 2: AAPL YTD PERFORMANCE.

AAPL is up over 23% year to date heading into earnings, compared to Alphabet Inc. (red line), Microsoft (teal line) and the Nasdaq (purple line). YTD performance as a percentage is shown on the right side of the chart. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Earnings season is starting to quiet down after last week, but there are two major companies reporting on Wednesday. Both Tesla (TSLA) and Facebook (FB) release first-quarter results after market close.

Good Trading,
JJ
@TDAJJKinahan

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