AAPL Stock: Are the Bears Wrong About Apple Inc. Earnings?

AAPL StockWhat Apple Stock Investors Should Look For

The surge in Apple Inc. (NASDAQ:AAPL) stock since its February low seems to be proving Apple bears wrong. When the largest company in the world by market cap climbs nearly 20% in just two months, things look pretty good.

But Apple stock is having its earnings syndrome again. As the company approaches its second-quarter results for fiscal 2016, bearish sentiment has started to dominate. Since mid-April, AAPL stock has slipped 6.3%.

That being said, Apple isn’t really known for delivering bad earnings. In 2015, the company managed to beat Wall Street’s earnings-per-share (EPS) estimates in all four quarters. (Source: “Analyst Estimates,” Yahoo! Finance, last accessed April 25, 2016.)

Given Apple’s impressive track record, why are investors so bearish? Well, as the king of its industry, the market is worried that Apple’s business could only go downhill.

Despite the variety of products and services Apple offers, it is, first and foremost, a hardware device maker. Last time the company reported, sales of its main product, the “iPhone,” accounted for 68% of total revenue. (Source: “Q1 2016 Unaudited Summary Data,” Apple Inc, January 26, 2016.)

Many investors have been skeptical about the iPhone’s growth potential. The reason is simple: when the product is already ubiquitous and competition is intensifying in the smartphone business, how can the company sell more iPhones?

The concern is reflected in Wall Street’s expectations. For the reporting quarter, analysts are expecting a 10.4% year-over-year decline in revenue to $51.97 billion. The bottom line is expected to deteriorate as well, with an average estimate of $2.00 in earnings per share, down 14.2% from the year-ago period.

Apple is going to release its earnings report at 5:00 p.m. Eastern Standard Time (EST) today. Is there anything going for it?

Well, iPhone sales are probably not going to be the catalyst. The company already warned investors in January that revenue could drop for the first time in more than a decade due to slowing iPhone sales. On average, analysts expect Apple to sell just 51.0 million iPhones in the reporting quarter, a substantial decline from the 61.2 million units sold in the year-ago period. (Source: “Apple Predicted an iPhone Sales Drop. Here It Comes,” CNET, April 24, 2016.)

A key reason for the potential sales decline is the product update cycle. Apple is expected to release a major new product—the “iPhone 7”—this September. Consumers who are thinking about getting a new iPhone might decide to wait until the new one comes out.

On the flip side, the company has a booming services segment. You see, Apple uses its own operating system on all its products—including the iPhone, “iPad,” “MacBook,” “iMac,” “iPod,” “Apple TV,” and “Apple Watch.” This creates huge monetization opportunities in services.

By the end of 2015, Apple’s active installed base had surpassed one billion. The giant userbase of Apple’s devices helped to boost its services revenue 26% year-over-year to $6.06 billion. (Source: “Apple Reports Record First Quarter Results,” Apple Inc, January 26, 2016.)

While the segment is still much smaller compared to the company’s hardware business, continued growth in services could offset some of the declines in iPhone sales. And let’s not forget that software and services do not face the same product update cycle as hardware devices. So, there could be more stability in the segment as well.

The Bottom Line on AAPL Stock

As we saw last time, a headline earnings beat won’t be enough for Apple stock. The market is focusing on two numbers—revenue and iPhone sales.

But then again, the bar has already been lowered and Apple’s price-to-earnings multiple is just above 11X. If things turn out to be better than expected, AAPL stock could climb back up again.