Apple's Q3 Earnings Approach: iPhone 16 Anticipation and AI Prospects

Bernstein reiterates $240 price target on Apple stock; all eyes on iPhone 16 By Investing.com

Tuesday, Bernstein reaffirmed its positive stance on Apple Inc. (NASDAQ:AAPL) with an Outperform rating and a steady price target of $240.00. The firm anticipates Apple's fiscal third-quarter performance to align with the general market consensus. The forecast suggests higher-than-usual revenue growth for the quarter, which appears feasible due to improved iPhone sales in China, as indicated by recent data, and the continued strength of iPad and Mac sales, buoyed by favorable PC industry figures and the release of a new iPad model. While expectations for significant revenue surges in the quarter are tempered, the focus shifts to the fourth quarter, where market predictions for continued above-seasonal growth might be overly optimistic, potentially leading to more conservative revenue guidance. Bernstein's own Q4 revenue projection is $3.0 billion less than the consensus. However, the firm believes that investor attention is already pivoting towards the upcoming iPhone 16 release and the fiscal year 2025, suggesting that the Q4 guidance may not be as critical in forecasting the strength of the upcoming product cycle. Bernstein suggests that the potential delay of the upgrade cycle beyond fiscal year 2025 should not necessarily be viewed negatively. The anticipation is that advancements in AI functionality will drive a robust upgrade cycle. If AI developments are distributed between the iPhone 16 and 17 cycles, it could potentially benefit the stock. Investors are advised to consider several key factors beyond the immediate guidance: the growth and margins in Apple's Services segment, the performance of Apple's business in China, the gross margins on products and the dynamics influencing them, and any shifts in the company's research and development and capital expenditure plans, particularly in light of its private cloud compute expansion. Additionally, insights into Apple's broader strategies in artificial intelligence are deemed important for a comprehensive understanding of the company's prospects. In other recent news, global finance leaders, including the G20 finance ministers, are actively discussing the advancement of a global digital tax agreement, known as "Pillar 1". This initiative aims to replace individual digital services taxes (DSTs) on major U.S. technology companies with a system that redistributes taxing rights among global firms. In the political arena, President Joe Biden's decision not to seek re-election has led to a shift in the electoral landscape, with investors reevaluating the prospects of a potential win by Donald Trump in the upcoming November elections. This has influenced the performance of certain stocks, including those of tech giants like Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL), and Apple. In the technology sector, investors are anticipating upcoming earnings reports from major companies such as Tesla (NASDAQ:TSLA) and Alphabet, which are expected to kick-start the earnings season for the "Magnificent Seven" megacaps. These earnings reports are crucial as they could potentially alleviate the recent losses experienced in the tech sector and reinforce the narrative of tech growth and profitability. Additionally, there are high expectations for year-over-year earnings growth in the tech sector, projected at 17%, which surpasses the estimated 11% rise for the S&P 500 overall. These are among the recent developments that investors are following closely, as they could significantly influence the performance of various stocks and the overall market. As Bernstein reiterates a positive outlook on Apple Inc., it's worth noting some key financial metrics and InvestingPro Tips that could be of interest to investors. Apple's market capitalization remains robust at $3.43 trillion, reflecting its significant presence in the market. The company's P/E ratio stands at 34.86, which, while indicating a high earnings multiple, also underscores the premium investors are willing to pay for Apple's consistent performance and market leadership in the Technology Hardware, Storage & Peripherals industry. InvestingPro Tips highlight Apple's track record of raising its dividend for 12 consecutive years, showcasing a commitment to returning value to shareholders. Additionally, Apple's cash flows have been strong enough to cover interest payments, suggesting a healthy financial position. Investors might also find it relevant that Apple has maintained dividend payments for 13 consecutive years and operates with a moderate level of debt. For those considering adding Apple to their portfolio, the company's strong return over the last three months, with a price total return of 34.37%, may be an attractive point. Moreover, the firm's dividend yield currently stands at 0.45%, with a notable dividend growth of 8.7% in the last twelve months as of Q1 2023. These figures are complemented by a solid return on assets of 29.99%, further reinforcing Apple's financial strength. For more in-depth analysis and additional InvestingPro Tips, visit InvestingPro. And remember, use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. There are 16 additional tips available on InvestingPro that can guide your investment decisions with Apple.

Apple stock is up 30% since Q2. Now what? By Investing.com

Apple stock has surged 30% since the second quarter, and now all eyes will be on the tech giant's upcoming earnings report scheduled for August 1. Bernstein analysts expect Apple Inc (NASDAQ:AAPL) Q3 earnings to align closely with consensus estimates, projecting revenues of $83.7 billion, a 2.3% year-over-year increase, compared to the consensus estimate of $84.3 billion. The anticipated revenue growth is supported by improving iPhone sales in China and strong performance in the iPad and Mac segments. "That said, we do not expect material revenue upside in the quarter," the investment firm's analysts added. Looking ahead to Q4, the consensus models higher-than-seasonal growth, which Bernstein views as aggressive. They predict that Apple might guide lower on revenue for Q4, estimating $89.3 billion compared to the consensus of $92.3 billion. However, they believe this guidance might not heavily impact investor sentiment, as attention is shifting toward the iPhone 16 and FY 2025. "A key question is whether an upgrade cycle could get pushed out beyond FY 25," Bernstein analysts continued. "We continue to expect AI functionality to lead to a strong upgrade cycle, and that it may not be a bad thing for the stock if AI tailwinds are spread out between the iPhone 16 and 17 cycles," they added. Analysts highlighted several key areas to watch in Apple's upcoming earnings print. Among those is growth in the company's Services unit, which has outgrown the rest of Apple's business, contributing significantly to revenue. They project Services revenue growth for Q3 at 13% and 12% for the year, supported by strong growth in iCloud, licensing, and the App Store. Meanwhile, the health of Apple's China business remains a concern, despite stronger iPhone volumes in May. There are doubts about the accuracy of third-party data and the sustainability of this strength, given that it partly resulted from discounting. Apple's product gross margins have also improved significantly, driven by various factors including higher iPhone mix and lower depreciation expenses. However, Bernstein analysts caution rising memory prices and price concessions on iPhones could pressure margins in the future. "While the impact might not be felt until the iPhone 16 cycle, we believe investors should closely monitor commentary around the gross margin forces at work. We forecast Q4 gross margins to decline sequentially from 46.3% to 46.1%," analysts wrote. Moreover, any changes to R&D and capex spending plans - particularly related to the build-out of private cloud compute - and broader commentary on Apple Intelligence will also be closely scrutinized, they noted. Bernstein has reiterated an Outperform rating on AAPL stock ahead of its Q3 report, with a price target of $240. "We believe recent enthusiasm is likely to persist in the near term, as Apple is increasingly seen as an AI leader rather than a laggard, and the stock is also in its seasonally strong trading period," the firm's team explained.

Will Apple's Q3 Results Get An AI Bump?

Apple (NASDAQ:AAPL) is expected to publish its Q3 FY'24 results on August 1, reporting on a quarter that is likely to see the company's business improve, driven by higher Mac, services, and iPhone sales. We expect revenue to come in at $84.3 billion, up about 10% year-over-year, while earnings are likely to come in at $1.35 per share, about 13% ahead of last year's number. Both our estimates are slightly ahead of the consensus. See our analysis of Apple Earnings Preview for a closer look at what to expect when Apple publishes its Q3 results. Apple's iPhone business could see modest growth this quarter, driven by emerging markets such as India. According to estimates from IDC, Apple shipped 45.2 million iPhones in Q2, up 1.5% year-over-year, although its overall smartphone market share declined a bit. Moreover, Apple could also benefit from a more favorable product mix, helping average selling prices of its iPhones. However, the iPhone has been facing headwinds in China, one of its largest markets, and the company has been resorting to discounts to prop up sales and better compete with the likes of Huawei, who has been gaining ground in the high-end of the market. Apple's Mac business could fare well over FY Q3 as demand recovers following a post-Covid slump. According to IDC, Apple's shipments rose 20.8% year-over-year, outpacing the broader PC market which rose by about 3%. Apple's digital services business should also fare well, driven by higher sales at the AppStore and improving the uptake of other subscription services. Over Q2 FY'24, services sales grew 14% to $23.9 billion. Although Apple has seen its gross margins rise in recent years, driven by a favorable sales mix skewed toward premium products as well as higher services sales and we expect this trend to continue over Q3 as well. Separately, the launch of Apple's new generative AI software - which includes upgrades to its Siri voice assistant, writing assistance tools, calculators, and image processing tools - could also begin to drive an upgrade cycle for the company. Apple is only offering the new AI tools, dubbed Apple Intelligence, on its higher-end devices to begin with. This is likely because many of the features require higher-power processing capabilities and use more on-device computing. For instance, the new AI assistant will only run on iPads and Macs with M1 and later chips. The only iPhones that will support the AI tools are the iPhone 15 Pro and Pro Max, which are equipped with the A17 Pro chip. For perspective, the cheapest iPads that support Apple AI cost about $600, which the number jumps to $1000 for the iPhone Pro. While we think it's very likely that Apple will bring AI to more new devices in future product launch cycles, it's safe to assume that the vast majority of Apple consumers, especially iPhone users, will need to upgrade devices to get access to the full suite of AI capabilities. AAPL stock has seen extremely strong gains of 75% from levels of $130 in early January 2021 to around $230 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in AAPL stock has been far from consistent. Returns for the stock were 35% in 2021, -26% in 2022, and 49% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that AAPL underperformed the S&P in 2022. In fact, consistently beating the S&P 500 - in good times and bad - has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, NVDA, and ORCL, and even for the mega-cap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could AAPL face a similar situation as it did in 2022 and underperform the S&P over the next 12 months - or will it see a strong jump? We value Apple at about $202 per share, which is about 12% below the current market price. Apple stock trades at about 34x FY'24 earnings, which is elevated compared to historical levels. However, Apple should see revenue growth pick up from the next fiscal year, driven by the introduction of new generative AI offerings and its upcoming iPhones, which could see more substantial updates. Margins are also likely to pick up, driven by a more favorable product mix skewed toward high-end devices, higher digital service sales, and lower component costs. See our analysis of Apple Valuation for more details on what's driving our price estimate for Apple and how it compares with peers. Invest with Trefis Market-Beating Portfolios See all Trefis Price Estimates The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Apple Q3 Preview: Bears, Get Ready For Another iPhone Lesson (NASDAQ:AAPL)

I last covered Apple Inc. (NASDAQ:AAPL) about a month ago (on June 14, 2024, to be exact). The article was titled Apple: How It Shorts Fiat Money And Why It Benefits Me. The article argued for its attractive long-term return prospects, with a particular focus on its capital allocation flexibility. More specifically, Apple Inc. is a strong buy both in the near term and also long term. In the near term, I see the AI upgrades announced in its WWDC24 conference to be a dominating force in the next 1~2 years. In the longer term, Apple's unique strength allows it to short fiat money at a large scale via share repurchases and cheap borrowing. This creates double (or even triple) compounding benefits for Apple shareholders. In this article, I want to switch the perspective to the near term given its upcoming earnings report (ER). To wit, AAPL is scheduled to hold a conference call to discuss fiscal Q3 earnings results on Thursday, August 1, 2024. In the remainder of this article, I will detail the catalysts I expect to see in this upcoming ER, especially those surrounding its flagship iPhones. In a nutshell, I expect the ER to serve another blow to bears who have been betting against the company. Many AAPL investors (in particular, the bears) have become overly sensitive to the iPhone shipment data, in my view. As a recent example, earlier this year, the market was very concerned about the softened demand and competition in the smartphone market in China. The concern has led to a stock price correction for AAPL to as low as $165 as illustrated by the chart below. However, such an overreaction missed a few key considerations. First, quarterly fluctuations largely represent noises in my view, especially for cyclical markets such as smartphones. Indeed, as the latest IDC data shows, global smartphone shipments have reversed the trend in recent quarters and rose 6.5% in Q2 2024. More importantly (the quote was slightly edited by me and the emphases were added by me also): Global smartphone shipments increased 6.5% in the second quarter, driven by Apple and Samsung... According to IDC, smartphone shipments rose to 285.4 million units in the second quarter, marking the fourth consecutive quarter of shipment growth. As Apple and Samsung both continue to push the top of the market and benefit the most from the ongoing premiumization trend, many leading Chinese OEMs are increasing shipments in the low end in an attempt to capture volume share amidst weak demand. The comments below lead me to the second key factor bears often miss on iPhone-related issues: its premium pricing and remarkable pricing power. As a result, even IF the growth in volume slows, I do not expect sales in dollar amounts to slow, and historical data seem to support this perspective. AAPL's iPhones have been able to increase their prices substantially (even after adjusting for inflation) over the years, and customers are happy to pay for them. As seen in the next chart below, the 1st generation iPhone (still remember how it looks?) was priced at $755 on an inflation-adjusted basis (or $499 "only" when not adjusted for inflation). Fast-forward to 2023, the iPhone 15 series is priced in a range of $822 to $1,234 on an inflation-adjusted basis. Equally fundamentally, AAPL has now evolved a highly sticky ecosystem based on its iPhones, as detailed next. As a reflection of the potency of the ecosystem surrounding its iPhones, Apple's services revenue has grown significantly over the past few years. They reached an all-time high in the more recent quarter at $85.2 billion, as illustrated by the chart below. Looking ahead, I anticipate the company to keep reporting robust growth in services in the Q3 ER. My optimism is rooted in several reasons. First and foremost, service revenues are stickier and more likely to recur than hardware sales. Second, service revenues also enjoy higher margins than hardware sales (which are already terrific due to iPhones' pricing power, as argued above). Its financials do point to an upward trend in profitability in tandem with the expansion of service revenues. To wit, the chart below shows AAPL's operating margin (top panel) and profit margin (bottom panel) recently. As shown, both margins have trended upward over the past few years, and both currently hover well above the 5-year averages. The operating margin currently is about 30.7% and the profit margin is about 26.3%, in contrast to their five-year average of 28.4% and 24.1%, respectively. Finally, AAPL's service revenue is well-supported by a mind-boggling installed base of over two billion. Such an installed base can also help to support revenues from other related product lineups such as iTunes, Apple Music, iCloud, Apple TV+, and accessories. In particular, I also look forward to more updated information on the development of Apple Intelligence and its integration with the iPhones in the upcoming ER. I am optimistic that this integration of AI will catalyze a strong wave of iPhone replacements/upgrades among its user bases. I expect the integration to continue the hallmark of AAPL products: powerful, intuitive, and well-meshed into the experiences of other AAPL devices. In terms of downside risks, both AAPL and its tech peers face a common set of headwinds, such as the overall global economy, potential disruptions in the supply chain, etc. However, given Apple's unique model, it also has some company-specific risks. The top one in my view is its relatively large exposure to China. It relies on China extensively, both for its manufacturing needs and also as a key end market. The exposure entails considerable geopolitical risks, given the ongoing tension between the U.S. and China. The ongoing presidential election in the U.S. further compounds such geopolitical risks, especially considering the potential candidates' vastly different platforms on trade and tariffs (among other things). Another specific risk involves AAPL's valuation multiples. Due to the large price rallies in the past quarter, AAPL now trades at an elevated valuation, not only in absolute terms but even by the FAANG standard. More specifically, the chart below compares AAPL P/E to the rest of FAANG stocks. As seen, in FY1 non-GAAP terms, Apple has the second highest P/E ratio of 33.9x only after Amazon.com, Inc. (AMZN). Alphabet Inc. (GOOG), (GOOGL) and Meta Platforms, Inc. (META) are trading around 23x of their FY1 earnings only. However, I won't recommend betting against a wonderful business only based on a relatively high valuation. Despite the P/E premium, my analyses still point to robust return potential both in the long term (the focus of my previous article) and in the near term. In particular, in the near term, I anticipate several catalysts from the upcoming FY Q3 earnings report serving another blow to the bears. These catalysts include the strong pricing power (which should offset volume fluctuations - if any) and the continued growth in service revenues (hardware sales have become only part of the equation by now).